PROSPECTUS

AYALA CORPORATION

=P10,000,000,000 7.20% FIXED RATE PUTABLE BONDS, DUE 2017

Issue Manager

Co-Issue Manager

FIRST METRO INVESTMENT CAPITAL CORPORATION

Joint Lead Underwriters

BDO CAPITAL & INVESTMENT CORPORATION BPI CAPITAL CORPORATION

CITICORP CAPITAL PHILIPPINES, INC. FIRST METRO INVESTMENT CORPORATION

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMIT ED ING BANK, N.V., MANILA BRANCH

RCBC CAPITAL CORPORATION STANDARD CHARTERED BANK

The date of this Prospectus is April 16, 2010

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENS E AND SHOULD BE REPORTED IMMEDIATELY TO THE SECURITIE S AND EXCHANGE COMMISSION.

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AYALA CORPORATION 33/F, TOWER ONE AYALA AVENUE CORNER PASEO DE ROXAS MAKATI CITY 1200 PHILIPPINES TELEPHONE NUMBER: (632) 848-5643 Ayala Corporation is offering Bonds due 2017 (the “Bonds”) with an aggregate principal amount of =P10,000,000,000.00 (the “Offer”). The Bonds shall have a term of seven (7) years from the Issue Date, with a fixed interest rate equivalent to 7.20% p.a. Interest on the Bonds shall be payable quarterly in arrears on April 30, July 30, October 30 and January 30 of each year (each of which is an “Interest Payment Date”) commencing on July 30, 2010 or the subsequent Business Day without adjustment if such Interest Payment Date is not a Business Day. The last interest payment date shall fall on the Maturity Date (as defined below) while the Bonds are outstanding (see “Description of the Bonds” – “Interest”). The Bondholders shall have a one time Put Option (s ee “Description of the Bonds” – “Put Option”) five (5) years from Issue Date. Unless previously purchased or cancelled, the Bonds will be redeemed at par (or 100% of face value) on April 30, 2017 (the “Maturit y Date”) or as otherwise set out in “ Description of the Bonds ” – “ Redemption and Purchase ” and “ Payment in the Event of Default ” sections of this Prospectus unless the Bondholders exercise the Put Option. The Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligations of Ayala and shall at all times rank pari passu and rateably without any preference or priority amongst themselves and at least pari passu with all other present and future unsubordinated and unsecured obligations of Ayala, other than obligations preferred by law. The Bonds will effectively be subordinated in right of payment to all of Ayala’s secured debts to the extent of the value of the assets securing such debt and all of its debt that is evidenced by a public instrument under Article 2244(14) of the Civil Code of the Philippines. The Bonds have been rated PRS Aaa by the Philippine Rating Services Corporation (“PhilRatings”) as of March 25, 2010. The rating denotes Ayala’s extremely strong capacity to meet its financial commitment on the obligations. The rating is not a recommendation to buy, sell, or hold securities and may be subject to revision, suspension, or withdrawal at any time by the rating agency concerned. The Bonds shall be offered to the public at face value through the Joint Lead Underwriters and Participating Underwriters. The Philippine Depository and Trust Corporation (“PDTC”) will act as the Registrar and BPI Stock Transfer Office as Paying Agent of the Bonds. It is intended that upon issuance, the Bonds will be lodged with the PDTC. On the Issue Date, the Bonds will be issued in scripless form and in denominations of =P50,000 each, as a minimum, and in integral multiples of =P10,000 thereafter. The Bonds will be eligible for trading under the Scripless Book Entry System of the PDTC. Transfers of the Bonds should be coursed through a PDTC Participant in the PDTC system. (See “Description of the Bonds” – “Transfer of Bonds”) Ayala intends to cause the listing of the Bonds on a securities exchange licensed with the SEC and has initiated discussions with the Philippine Dealing and Exchange Corp ("PDEx") for this purpose. However, there can be no assurance that such a listing will actually be achieved either before or after the Issue Date or whether such a listing will materially affect the liquidity of the Bond on the secondary market. Such a listing would be subject to the Company's execution of a listing agreement with PDEx that may require the Company to make certain disclosures, undertakings and payments on an ongoing basis. Ayala expects to raise gross proceeds amounting to =P10,000,000,000. The net proceeds are estimated to be =P9,898,161,875 after deducting expenses relating to the issuance of the Bonds. Proceeds of the Offer will be used by Ayala for general working capital (see “Use of Proceeds”). The Joint Lead Underwriters will receive a fee of 0.40%, gross up for gross receipts tax, on the underwritten principal amount of the Bonds issued. Such fee shall be inclusive of underwriting, and participation commissions. (see “Plan of Distribution”) Unless otherwise stated, the information contained in this Prospectus relating to Ayala and its operations has been supplied by Ayala, which hereby accepts full responsibility for the accuracy of the same, and confirms, having made all reasonable inquiries, that to the best of its knowledge and belief, there are no other material facts, the omission of which would make any statement in this Prospectus misleading in any material respect. As to the other information which are made on the basis of, or in connection with, information, data or analyses which were either provided to

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Ayala by its advisers and consultants or otherwise available in the market and from any public source, Ayala confirms that it has made all reasonable inquiries in respect of the same and have used or adopted such information, data or analyses in good faith. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstance, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. The Joint Lead Underwriters do not make any representation, express or implied, as to the accuracy or completeness of the materials contained herein. No dealer, salesperson or other person has been authorized by Ayala or the Joint Lead Underwriters to issue any advertisement or to give any information or make any representation in connection with the Offer or sale of the Bonds other than those contained in this Prospectus and, if issued, given or made, such advertisement, information or representation must not be relied upon as having been authorized by Ayala or the Joint Lead Underwriters. The contents of this Prospectus are not to be considered as legal, business, or tax advice. The Joint Lead Underwriters do not make any representation or warranty, express or implied, as to the accuracy or completeness of the information in this Prospectus. Each person receiving this Prospectus acknowledges that such person has not relied on the Joint Lead Underwriters or any other person in his investigation of the accuracy of such information or his investment decision. Each person contemplating an investment in the Bonds must make his own investigation and analysis of the creditworthiness of Ayala and his own determination of the suitability of any such investment. Investing in the Bonds involves certain risks. For a discussion of certain factors to be considered in respect of an investment in the Bonds, see the section entitled “Risk Factors”. Ayala is organized under the laws of the Philippines. Its principal office is at the 33rd Floor Tower One and Exchange Plaza, Ayala Avenue corner Paseo de Roxas, Ayala Triangle, Makati City, with telephone number (632) 848-5643. ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL INFORMATION CONTAINED HEREIN IS TRUE AND CURRENT. AYALA CORPORATION By:

Fernando Zobel de Ayala President and Chief Operating Officer

TTAABBLLEE OOFF CCOONNTTEENNTTSS TABLE OF CONTENTS iv FORWARD LOOKING STATEMENTS 1 DEFINITION OF TERMS 2 EXECUTIVE SUMMARY 5 RISK FACTORS 14 USE OF PROCEEDS 23 PLAN OF DISTRIBUTION 25 DESCRIPTION OF THE BONDS 30 THE COMPANY 52 BUSINESS 61 I. Real Estate and Hotels 61 II. Financial Services 74 III. Telecommunications 77 IV. AC Capital 99 LEGAL PROCEEDINGS 121 OWNERSHIP 122 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 123 MANAGEMENT 139 MATTERS AFFECTING LIQUIDITY AND CAPITAL EXPENDITURE 152 NAMED EXPERTS AND COUNSEL 153 TAXATION 154 FINANCIAL INFORMATION 157

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FFOORRWWAARRDD LLOOOOKKIINNGG SSTTAATTEEMMEENNTTSS This Prospectus contains certain “forward-looking statements”. These forward-looking statements generally can be identified by use of statements that include words or phrases such as “believes”, “expects”, “anticipates”, “intends”, “plans”, “foresees”, or other words or phrases of similar import. Similarly, statements that describe Ayala’s objectives, plans or goals are also forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from the expectations of Ayala include, among others: � General economic and business conditions in the Philippines;

� Holding company structure;

� Intensive capital requirements of subsidiaries and affiliates of Ayala in the course of business;

� Increasing competition in the industries in which Ayala’s subsidiaries and affiliates operate;

� Industry risk in the areas in which Ayala’s subsidiaries and affiliates operate;

� Changes in laws and regulations that apply to the segments or industries in which Ayala, its subsidiaries and affiliates operate;

� Changes in political conditions in the Philippines;

� Changes in foreign exchange control regulations in the Philippines; and

� Changes in the value of the Philippine Peso. For further discussion of such risks, uncertainties and assumptions, see “Risk Factors”. Prospective purchasers of the Bonds are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included herein are made only as of the date of this Prospectus, and Ayala undertakes no obligation to update such forward-looking statements publicly to reflect subsequent events or circumstances.

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DDEEFFIINNIITTIIOONN OOFF TTEERRMMSS Unless otherwise indicated, the following terms shall have the meanings set forth below: 3G Third generation radio frequency spectra AAHC Ayala Automotive Holdings Corporation ACC Alabang Commercial Corporation ACIFL AC International Finance Ltd. AHI Ayala Hotels, Inc. Affiliates Associates and Jointly Controlled Entities Affinity Affinity Express, Inc. AG Holdings, Ltd. AG Holdings Limited AIHC Ayala Insurance Holdings Corporation AIPL Ayala International Pte Ltd. ALI Ayala Land, Inc. APMC Ayala Property Management Corporation Application to Purchase Document to be accomplished by applicants for the application to

purchase the Bonds Asiacom Asiacom Philippines, Inc. ASTI Ayala Systems Technology, Inc. Avida Avida Land Corporation, whose former corporate name was Laguna

Property Holdings, Inc. Ayala Ayala Corporation (also the “Company” or the “Issuer”) Ayala Group Ayala Corporation and its subsidiaries Ayala Greenfield Ayala Greenfield Development Corporation Azalea Technology Azalea Technology Investments, Inc. Azalea International Azalea International Venture Partners Ltd. Banking Day A day, excluding Saturdays, Sundays and holidays, when banks are not

allowed to close for business in Metro Manila, Philippines BayanTrade BayanTrade Dotcom, Inc. Bayantel Bayan Telecommunications Philippines, Inc. BCDA Bases Conversion Development Authority BMA Bridge Mobile Alliance Board The Board of directors of Ayala Bonds Ayala’s 7.20% p.a. Fixed Rate Putable Bonds due 2017 Bondholders Holders of the Bond BPI Bank of the Philippine Islands BPI Capital BPI Capital Corporation BPI Group BPI and its subsidiaries BPO Business Processing Outsourcing BSP Bangko Sentral ng Pilipinas Business Day A day, except Sunday, Saturday or legal holidays, in which Philippine

banks are required to open for business in the cities of Makati, Manila and Mandaluyong

CAGR Compounded Annual Growth Rate CAR Capital Adequacy Ratio CHI Cebu Holdings, Inc. CII Community Innovations, Inc. Class “A” shares Ayala’s Class “A” preferred shares Class “AA” shares Ayala’s Class “AA” preferred shares

Definition of Terms

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Common shares Ayala’s common shares CPI Philippine Consumer Price Index CPVDC Cebu Property Ventures Development Corporation Digitel Digitel Communications Philippines, Inc. Director A director of Ayala DOSRI Directors, Officers, Stockholders and other Related Interests DBS Development Bank of Singapore EBITDA Earnings Before Interests, Taxes, Depreciation and Amortization EMS Electronics Manufacturing Services eTelecare eTelecare Global Solutions, Inc. FBDC Fort Bonifacio Development Corporation FCDA Foreign Currency Differential Adjustment G&A Expense General and Administrative expense Globe Globe Telecom, Inc. IAS International Accounting Standards IDD International Direct Dialing IFC International Finance Corporation ILD International Long Distance Interest Payment Dates April 30, July 30, October 30 and January 30 of each year until the

Maturity Date Interest Rate 7.20% per annum IMI Integrated Microelectronics, Inc. Innove Innove Communications, Inc. Integreon Integreon Managed Solutions, Inc. IPO Initial Public Offering Issue Manager BPI Capital Issuer Ayala Corporation Joint Lead Underwriters BDO Capital & Investment Corporation, BPI Capital, Citicorp Capital

Philippines, Inc., First Metro Investment Capital Corporation, The Hongkong and Shanghai Banking Corporation Limited, ING Bank, N.V., Manila Branch, RCBC Capital Corporation, and Standard Chartered

LiveIt LiveIt Investments Limited LSI LiveIt Solutions, Inc. Maturity Date April 30, 2017 Majority Bondholders Bondholders holding more than fifty percent (50%) of the principal

amount of the Bonds then outstanding. MDC Makati Development Corporation Mitsubishi Mitsubishi Corporation MMS Multimedia Messaging Service MWC Manila Water Company, Inc. MWSS Metropolitan Waterworks and Sewerage System NDD National Direct Dialing NPL Non-performing Loans NRW Non-revenue Water NTC National Telecommunications Commission OEM Original Equipment Manufacturers Offer Offer for subscription to =P10,000,000,000.00 7.20% p.a. Fixed Rate

Putable Bonds of Ayala, due 2017 Offer Period The Offer shall commence on April 20, 2010 and end on April 26, 2010. OFW Overseas Filipino Workers Underwriters Shall refer collectively to the Joint Lead Underwriters PAS Philippine Accounting Standards

Definition of Terms

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Paying Agent BPI Stock Transfer Office PCBA Printed Circuit Board Assembly PDEx Philippine Dealing and Exchange Corporation PDTC Philippine Depository and Trust Corporation PFRS Philippine Financial Reporting Standards PhilRatings Philippine Rating Services Corporation PLDT Philippine Long Distance Telephone Company PSE Philippine Stock Exchange Put Option The Bondholder’s option to require the Issuer to redeem the outstanding

Bonds registered in such Bondholder’s name in denominations of P50,000 each, as a minimum and in integral multiples of P10,000 thereafter.

Put Option Date April 30, 2015 or immediately succeeding Business Day if such date is not a Business Day, which is the Twentieth (20th) Interest Payment Date

Put Exercise Period Anytime during business hours on a date no earlier than sixty (60) days and no later than thirty (30) days prior to the Put Option Date

Put Option Payment Aggregate of; (i) par or one hundred percent (100%) of face value of the outstanding principal amount; and (ii) accrued interest

Record Date Cut-off date in determining Bondholders entitled to receive interest or principal amount due

Registrar Philippine Depository and Trust Corporation SEC Securities and Exchange Commission SGV & Co. SyCip Gorres Velayo & Co. Smart Smart Communications, Inc. SMS Short Message Service Speedy-Tech Speedy-Tech Electronics Ltd. STI Singapore Telecom International TM Touch Mobile Trustee Metropolitan Bank and Trust Company – Trust Banking Group Unrestricted Period The period from the Issue Date, until and including ten (10) days prior to

the first Interest Payment Date VAT Value-added Tax WAP Wireless Application Protocol WiFi Wireless Fidelity

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EEXXEECCUUTTIIVVEE SSUUMMMMAARRYY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Because it is a summary, it does not contain all of the information that a prospective purchaser should consider before investing. Prospective investors should read the entire Prospectus carefully, including the section entitled “Risk Factors and Other Considerations” and the financial statements and the related notes to those statements included in this Prospectus. The Company The Company was incorporated in the Philippines on January 23, 1968 as a limited liability corporation having a renewable term of 50 years. It is organized as a holding company holding equity interests in the Ayala Group (the “Ayala Group”), one of the most significant business groups in the Philippines. Ayala’s business activities are divided into: (a) real estate and hotels, (b) financial services, (c) telecommunications, (d) water distribution and wastewater services, (e) electronics manufacturing solutions services, (f) automotive dealerships, (g) business process outsourcing (BPO), and (h) investments in overseas real estate projects and technology-related ventures. Ayala’s real estate and hotels business is primarily conducted through its subsidiary, Ayala Land, Inc. (“ALI”), a diversified real estate company in the Philippines (see “Business - Real Estate and Hotels”). Its involvement in financial services and insurance businesses is done through an affiliate, the Bank of the Philippine Islands (“BPI”), which, together with its subsidiaries (together, the “BPI Group”), form a universal banking group in the Philippines (see “Business - Financial Services”). Ayala’s telecommunications business is carried out through an affiliate, Globe Telecom, Inc. (“Globe”), one of the leading telecommunications companies in the Philippines (see “Business - Telecommunications”). Ayala’s investments in water distribution under Manila Water Co., Inc. (“Manila Water” or “MWC”), electronics manufacturing services under Integrated Microelectronics, Inc. (IMI), business process outsourcing (“BPO”) under its holding company LiveIt, automotive dealerships under Ayala Automotive Holdings, Corp., joint ventures in international real estate assets through AG Holdings, and information technology-related ventures and various non-core assets and investments through a variety of subsidiary and affiliated companies are overseen by an internal division under AC Capital (see “Business - AC Capital”). Ayala became a publicly listed corporation in 1976 when it listed its common shares with the then Makati Stock Exchange. As of December 31, 2009, Ayala had a market capitalization of =P150.7 billion based on its closing price of =P302.50 per share. In addition, certain members of the Ayala Group, namely ALI, BPI, Globe, MWC, Cebu Holdings, Inc. (“CHI”), and Cebu Property Ventures Development Corporation (“CPVDC”), and IMI are likewise publicly listed corporations. Some of Ayala’s subsidiaries and affiliates have holdings in the equity of other subsidiaries and affiliates. Members of the Zobel de Ayala family, individually and through their control of Mermac, Inc., a private holding company incorporated in the Philippines (which held 50.78% of Ayala as of December 31, 2009), are the dominant shareholders of, and effectively control, Ayala. Ayala’s other current principal shareholders are Mitsubishi Corporation (“Mitsubishi”) (which held 10.55% of Ayala as of December 31, 2009), and SM Group (which held 3.85% of Ayala as of December 31, 2009). Financial Highlights Ayala Corporation’s 2009 consolidated net income attributable to equity holders of the parent reached =P8.2 billion at par with prior year’s earnings with substantially lower capital gains from share sales in 2009. Excluding capital gains, consolidated net income attributable to equity holders of the parent grew by 34%. The growth was driven by the strong performance of its major business units, even amidst a

Executive Summary

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sluggish economic environment. Ayala’s total equity share in the earnings of its business units rose by 18% to =P9.2 billion. In real estate, ALI’s residential sales recovered beginning the second quarter with take-up rates improving through the fourth quarter. Its leasing revenues from shopping centers and office/BPO spaces grew by 20% with the expansion in gross leasable area and generally steady occupancy rates. ALI posted =P4 billion in net income attributable to equity holders of ALI in 2009, 16% lower than prior year which included gains from a lot sale. Excluding the impact of the lot sale, net income attributable to equity holders of ALI was down by only 2%. The recovery in the residential sector was reaffirmed by two very successful residential project launches in January 2010. ALI is embarking on its most aggressive launch this year as it expands its presence in key cities and areas in the Philippines. The company recently sealed several lease and joint venture agreements with strategic partners for the construction of regional malls in the Subic Bay Freeport Area and Cagayan de Oro. It has opened MarQuee Mall in Pampanga in September last year and will also unveil Abreeza Mall in Davao City by next year. Its banking unit, Bank of the Philippine Islands (BPI) registered strong business volume, revenue, and earnings growth. Net income was up 33% to =P8.5 billion. Net interest income increased by 10% on account of the expansion in asset base and improvement in spreads. Noninterest income grew at an even faster rate of 25%. While corporate lending slowed, challenged by the high level of liquidity and the availability of funding through the capital markets, loans to SME, consumer market, and credit card customers remained robust, expanding at double-digit levels. The bank’s remittance business outpaced industry growth which resulted in BPI capturing over 20% of the overseas Filipino remittance business. Globe registered 11% earnings growth to =P12.6 billion. While its core mobile business was weighed down by intense competition and subscribers’ increasing preference for value offers on the back of weaker consumption, Globe made significant gains in its broadband business. Globe’s broadband subscribers expanded three-fold to over 715,000, while mobile subscribers reached 23.2 million by year-end following a deliberate churn out of marginal subscribers. Globe continues to invest in its broadband business to augment existing capacity, expand coverage, and improve the availability of 3G, WiMax, and DSL broadband services. Globe recently increased its dividend payout to a range of 75% to 90% of prior year’s earnings as it remains committed to optimizing its capital structure and delivering superior value to its shareholders. In line with this, Globe declared its first semi-annual cash dividend of =P40 per common share payable on March 15, 2010. AC Capital contributed positively in 2009, reversing the loss in 2008. This was driven by the strong earnings growth of water distribution unit, Manila Water Co., Inc., the turnaround of the electronics manufacturing business, Integrated Micro-Electronics, Inc. (IMI), and the significantly improved performance of Ayala’s holding company for its BPO investments. Manila Water posted a net income attributable to equity holders of MWC of =P3.2 billion, 16% higher than in 2008 as it expanded customer base, increased billed volume, and improved operating efficiency. Manila Water continued to expand its businesses in wastewater management and concessions outside of the east zone. In 2009 the company commissioned the 4–million liter per day Pineda Sewage Treatment Plant, in addition to the five additional sewage treatment facilities currently being constructed in the cities of Makati, Marikina, Quezon, and Taguig. These plants put the company on track to achieve 30% sewerage coverage by 2010. Beyond the east zone, Manila Water commenced the concessions in Laguna and Boracay with plans to improve the system, upgrade the existing network, reduce system losses, and improve reliability of water and wastewater services. Manila Water is also exploring water projects overseas and signed joint venture agreements with REE Corporation in Vietnam and Jindal Water Infrastructure Ltd. of India to explore water and wastewater-related projects in these countries.

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IMI posted a turnaround in 2009 with US$10 million in net income attributable to equity holders of IMI, a reversal of the net loss in 2008. However, with the electronics sector weighed down by the global economic downturn, full year revenues fell by 10% to US$396M. Revenue trends began to improve in the third quarter, with increased volumes for a leading Chinese OEM in the IMI has a strong financial position with consolidated cash of US$54M, strong liquidity, and zero net debt position which gives it sufficient flexibility to support its growth initiatives. IMI is well positioned to capture opportunities as the electronics industry recovers given its solid track record with its OEM customers, global footprint, and robust financial position. It recently completed its listing by way of introduction at the Philippine Stock Exchange in January 2010. Ayala’s BPO businesses held through LiveIt made considerable gains in achieving both scale and profitability. The merger of eTelecare with Stream in October 2009 created a top 7 global call center company, while Integreon’s acquisitions positioned it as the top global knowledge process outsourcing company. In the fourth quarter of 2009, the BPO companies attained combined annualized run rate revenues of US$911 million and EBITDA of US$77 million, of which LiveIt’s share was US$300 million and US$25 million respectively. LiveIt achieved positive operating net income before deal related charges and interest expense starting in the third quarter, which contributed to a significant reduction in its consolidated net loss to US$12 million in 2009. The loss was largely due to acquisition driven expenses and leverage. Ayala ended 2009 with cash of =P30 billion and parent net debt-to-equity ratio1 of 0.04 to 1.00. It recently announced its intent to bid for the Angat Hydroelectric Plant in early 2010. Strategy Ayala seeks to ensure that the Ayala Group maintains its commitment to its business activities in the Philippines and to explore possible international initiatives on a selective and opportunistic basis. Ayala intends to build on its leadership position in the Ayala Group's existing core businesses in real estate, financial services and telecommunications, and actively manage its portfolio of other investments and assets under AC Capital with a view toward maximum value creation and realization. Ayala expects its real estate, financial services and telecommunications businesses to remain its principal sources of dividend income, but contributions from its water distribution, electronics manufacturing and auto dealership operations are increasing. Ayala is presented from time to time with opportunities to invest in new business areas and will continue to consider such opportunities to the extent that such businesses would contribute to the overall strategic objectives of the Ayala Group. Recent Developments In 2009 Ayala Corporation entered into an agreement to acquire United Utilities’ 81.9 million common shares and economic interest in 2 billion preferred shares in Manila Water for a total consideration of =P3.5 billion. The proposed acquisition increases Ayala’s economic interest in Manila Water to 43.3% from the previously 31.7%. This transaction is expected to be value accretive for Ayala given the growth potential of Manila Water as it continues to explore opportunities beyond its concession area. This is part of Ayala’s broader strategy to re-invest in its current businesses to enhance and optimize values from its current portfolio. In 2009 Ayala made investments of roughly =P2.2 billion (US$46M). This included investments in its BPO businesses and in Arch Capital, a real estate fund under AG Holdings, which has live real estate development projects in China, Thailand, and India. Ayala also pursued its share buyback program, repurchasing a total of 466,360 Ayala Corp shares in 2009. As of March 31, 2010 total shares purchased amounted to =P1.9 million, bringing total shares bought back since 2007 to =P3.7 million.

1 Total of short-term debt and long-term debt less total of cash and cash equivalents and short-term investments divided by equity attributable to the parent.

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Future Plans and Prospects Ayala is confident that its financial prospects remain sound and are expected to strengthen further in the coming years as the Philippine economy gathers momentum and external global uncertainties subside. Ayala’s earnings are expected to remain stable in the near-term underpinned by the sustained recovery of the real estate industry, strong fundamentals of the banking sector, and the increasing demand for telecommunications services, particularly in broadband services. In the long-term, improved earnings prospects are expected from these key business units, given these are well-positioned in their respective industries and are expected to benefit from sectoral growth. Ayala is committed to strengthening its financial position further. Dividend flows to the Company have increased significantly over the past few years and this is a trend that is expected to be sustained as the operating cash flow at the subsidiary and affiliate level continues to improve. The increase in dividend flows to Ayala, in addition to any additional liquidity arising from possible capital reallocation and value realization in Ayala’s investment portfolio, are expected to facilitate Ayala’s plans to build new businesses and establish new growth platforms. As a holding company, Ayala is committed to explore new investment opportunities that will be the source of company growth and value moving forward.

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SUMMARY FINANCIAL INFORMATION

The following tables set forth financial and operating information on Ayala. Prospective purchasers of the Bonds should read the summary financial data below together with the financial statements, including the notes thereto, presented as an Annex and the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section of this Prospectus. The summary financial data as of December 31 2009 and 2008 and for each of the three years in the period ended December 31, 2009 are derived from Ayala’s audited financial statements, including the notes thereto, which are found elsewhere in this Prospectus.

This section includes financial and operating data with respect to Ayala’s subsidiaries (Ayala Land, Inc., Integrated Micro-Electronics, Inc., AG Holdings, Ltd., Azalea Technology Investments, Inc., Azalea International Venture Partners, Ltd. and Ayala Automotive Holdings Corporation), associates (Bank of the Philippine Islands) and jointly controlled entities (Globe Telecom, Inc. and Manila Water Company, Inc.). This section should be read in conjunction with the financial statements of these subsidiaries, associates and jointly controlled entities. The financial statements of these subsidiaries, associates and jointly controlled entities as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 are available for viewing at the office of the Philippine Securities and Exchange Commission located at the SEC Building, EDSA, Greenhills, Mandaluyong City, or at these companies’ respective principal places of business. The following table summarizes the financial highlights of Ayala’s consolidated financial performance:

Years Ended December 31 (Amounts in Thousands, Except Earnings Per Share

Figures) 2009 2008 2007 REVENUE

Sales and services P=62,627,206 P=64,052,828 P=56,578,214 Equity in net income of associates and jointly controlled

entities 7,361,015 7,396,180 9,767,222 Interest income 2,497,077 2,242,895 1,693,045 Other income 3,808,517 5,416,750 10,728,375 76,293,815 79,108,653 78,766,856 COSTS AND EXPENSES Costs of sales and services 49,318,294 50,014,366 43,169,110 General and administrative 9,214,570 9,485,514 9,498,306 Interest expense and other financing charges 3,822,342 4,937,108 4,120,160 Other charges 1,435,038 1,595,422 1,569,944 63,790,244 66,032,410 58,357,520 INCOME BEFORE INCOME TAX 12,503,571 13,076,243 20,409,336 PROVISION FOR INCOME TAX Current 2,010,214 2,442,789 1,979,820 Deferred (311,530) (25,234) (7,825) 1,698,684 2,417,555 1,971,995 INCOME BEFORE INCOME ASSOCIATED WITH

NONCURRENT ASSETS HELD FOR SALE 10,804,887 10,658,688 18,437,341 INCOME ASSOCIATED WITH NONCURRENT

ASSETS HELD FOR SALE - net of tax – – 624,788 NET INCOME P=10,804,887 P=10,658,688 P=19,062,129

Net Income Attributable to: Equity holders of Ayala Corporation P=8,154,345 P=8,108,597 P=16,256,601 Noncontrolling interests 2,650,542 2,550,091 2,805,528 P=10,804,887 P=10,658,688 P=19,062,129

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Years Ended December 31 2009 2008 2007 EARNINGS PER SHARE Basic Income before income associated with noncurrent

assets held for sale attributable to equity holders of Ayala Corporation P=14.23 P=15.22 P=30.64

Net income attributable to equity holders of Ayala Corporation 14.23 15.22 31.62

Diluted Income before income associated with noncurrent

assets held for sale attributable to equity holders of Ayala Corporation P=14.19 P=15.17 P=30.50

Net income attributable to equity holders of Ayala Corporation 14.19 15.17 31.47

December 31 (Amounts in Thousands) 2009 2008

ASSETS

Current Assets Cash and cash equivalents P=45,656,889 P=42,885,792 Short-term investments 4,560,976 1,008,924 Accounts and notes receivable - net 25,232,799 23,284,010 Inventories 10,797,048 10,011,355 Other current assets 6,547,004 7,090,394 Total Current Assets 92,794,716 84,280,475

Noncurrent Assets Noncurrent accounts and notes receivable 2,657,623 6,694,021 Land and improvements 17,582,562 15,756,894 Investments in associates and jointly controlled entities - net 71,556,952 68,140,394 Investments in bonds and other securities 3,543,458 3,064,502 Investment properties - net 29,089,730 21,344,980 Property, plant and equipment - net 7,771,863 13,884,817 Deferred tax assets - net 1,395,992 1,132,847 Pension assets 132,419 117,388 Intangible assets - net 4,611,884 3,865,397 Other noncurrent assets 1,341,836 1,906,172 Total Noncurrent Assets 139,684,319 135,907,412 Total Assets P=232,479,035 P=220,187,887

LIABILITIES AND EQUITY

Current Liabilities Accounts payable and accrued expenses P=27,664,537 P=27,483,536 Short-term debt 2,638,658 2,755,447 Income tax payable 506,114 214,697 Current portion of long-term debt 2,453,144 1,478,871 Other current liabilities 2,821,932 1,553,530

Total Current Liabilities 36,084,385 33,486,081

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December 31 (Amounts in Thousands) 2009 2008

Noncurrent Liabilities Long-term debt - net of current portion 51,431,583 50,250,151 Deferred tax liabilities - net 207,425 185,536 Pension liabilities 228,312 490,744 Other noncurrent liabilities 9,109,180 7,588,080 Total Noncurrent Liabilities 60,976,500 58,514,511 Total Liabilities 97,060,885 92,000,592

Equity Equity attributable to equity holders of Ayala Corporation Paid-up capital P=37,477,875 P=37,251,714 Share-based payments 1,059,588 705,457 Retained earnings 65,739,096 61,604,466 Cumulative translation adjustments (1,351,334) (968,778) Net unrealized gain (loss) on available-for-sale financial assets 123,916 (631,127) Parent Company preferred shares held by a subsidiary (100,000) (100,000) Treasury stock (688,714) (550,540) 102,260,427 97,311,192 Noncontrolling interests 33,157,723 30,876,103 Total Equity 135,418,150 128,187,295 Total Liabilities and Equity P=232,479,035 P=220,187,887

CAPITALIZATION

The following table sets forth Ayala’s consolidated short-term and long-term debt and capitalization as of December 31, 2009. This table should be read in conjunction with Note 2 of the Company’s consolidated financial statements the notes thereto located elsewhere in this Prospectus. 2009 2008 (In Thousands) Short-term debt P=2,638,658 P=2,755,447 Long-term debt 53,884,727 51,729,022 Total debt 56,523,385 54,484,469 Less: Cash and cash equivalents 45,656,889 42,885,792 Short-term investments 4,560,976 1,008,924 Net debt P=6,305,520 P=10,589,753

Equity attributable to equity holders of the Company P=102,260,427 P=97,311,192 Debt to equity 55% 56%

Net debt to equity 6% 11%

Executive Summary

12

SUMMARY OF THE OFFER Issuer

Ayala Corporation

Instrument

Seven (7) year fixed rate bonds (the “Bonds”) in the aggregate principal amount of up to Ten billion pesos (=P10,000,000,000).

Form and Denomination

The Bonds shall be issued in scripless form in minimum denominations of =P50,000 each and in integral multiples of =P10,000 thereafter.

Issue Price

At par (or 100% of face value).

Offering

The Bonds shall be offered to the public by Ayala through the Underwriters (see “Plan of Distribution”).

Offer Period

The Offer shall commence on April 20, 2010 and end on April 26, 2010.

Issue Date

The Bonds are expected to be issued on April 30, 2010.

Bondholder Put Option

The Bondholders shall have a one time option five (5) years from Issue Date to require the Issuer to redeem in whole or in part the outstanding Bonds registered in such Bondholder’s name (see “Description of the Bonds”)

Maturity Date

Unless the Bonds shall be redeemed by Ayala or the Bondholders exercise their Put Option, the Bonds shall mature on April 30, 2017.

Interest

Interest Rate The Bonds shall bear interest at a fixed rate of 7.20% p.a. (the “Interest Rate”) accruing from Issue Date until the Maturity Date or when the Bonds are otherwise redeemed in accordance with the Trust Indenture (see “Description of the Bonds”). Interest Payment Interest on the Bonds shall be calculated on a 30/360-day count basis and shall be paid quarterly in arrears starting on July 30, 2010 and on April 30, July 30, October 30, and January 30 of each year thereafter.

Final Redemption

Unless previously purchased and cancelled, the Bonds shall be redeemed at 100% of face value on their respective Maturity Dates.

Status of the Bonds

The Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligations of Ayala and shall at all times rank pari passu and rateable without any preference or priority amongst themselves and at least pari passu with all other present and future unsubordinated obligations of Ayala other than obligations preferred by law.

Executive Summary

13

USE OF PROCEEDS Ayala expects to raise gross proceeds amounting to approximately up to =P10,000,000,000 from the Offer. The net proceeds from the Offer is estimated to be =P9,898,161,875 after deducting expenses related to the Offer. The principal purpose for the offering is to be used by Ayala for general working capital account for its operations as a holding company. As a holding company, Ayala is consistently seeking opportunities for expansion both through organic growth of the existing lines of businesses as well as through transactions and acquisitions that would add value to the company and to the Ayala Group as a whole. Although there can be no assurance regarding what and when opportunities may arise, Ayala evaluates such opportunities on an ongoing basis. Ayala is presented from time to time with opportunities to invest in new business areas and it will continue to consider such opportunities to the extent that such businesses would contribute to the overall strategic objectives of the Group. RISKS OF INVESTING An investment in the Bonds involves a certain degree of risk. A prospective purchaser of the Bonds should carefully consider the following factors, in addition to the other information contained in this Prospectus, in deciding whether or not to invest in the Bonds. Risks Related to the Business

• Industry Risks • Competition • Foreign Exchange Risk • Intensive Capital Requirements • Government Regulation • Litigation • Data Management Systems • Holding Company Structure

Risks Related to the Country

• Political and Social Instability • Slowdown in the Economic Growth • Depreciation in the Value of the Peso Against the US Dollar.

Risks Related to the Bonds

• Liquidity Risk • Pricing Risk • Retention of Ratings Risk • Bonds have no Preference under Article 2244(14) of the Civil Code

This Prospectus contains forward-looking statements that involve risks and uncertainties. Ayala Corporation adopts what it considers conservative financial and operational controls and policies to manage its business risks. Ayala Corporation’s actual results may differ significantly from the results discussed in the forward-looking statements. See section “Forward-Looking Statements” of this Prospectus. Factors that might cause such differences, thereby making the offering speculative or risky, may be summarized into those that pertain to the business and operations of Ayala Corporation, in particular, and those that pertain to the over-all political, economic, and business environment, in general.

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RRIISSKK FFAACCTTOORRSS The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance and there may be a large difference between the buying price and selling price of these securities. Investors deal with a range of investments, each of which may carry different levels of risk. Investors should carefully consider all the information contained in this Prospectus, including the risk factors described below before deciding to invest in the Bonds. PRUDENCE REQUIRED The risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. An investor should undertake its, his or her own research and study on the trading of securities before commencing any trading activity. Investors may request information on the securities and Issuer thereof from the SEC which are available to the public. PROFESSIONAL ADVICE An investor should seek professional advice if he or she is uncertain of, or has not understood, any aspect of the securities to invest in or the nature of risks involved in trading of securities especially high risk securities. RISK FACTORS An investment in the Bonds described in this Prospectus involves a certain degree of risk. A prospective purchaser of the Bonds should carefully consider the following factors, in addition to the other information contained in this Prospectus, in deciding whether or not to invest in the Bonds. This Prospectus contains forward-looking statements that involve risks and uncertainties. Ayala Corporation adopts what it considers conservative financial and operational controls and policies to manage its business risks. Ayala Corporation’s actual results may differ significantly from the results discussed in the forward-looking statements. See section “Forward-Looking Statements” of this Prospectus. Factors that might cause such differences, thereby making the offering speculative or risky, may be summarized into those that pertain to the business and operations of Ayala Corporation, in particular, and those that pertain to the over-all political, economic, and business environment, in general. These risk factors and the manner by which these risks shall be managed are presented below. Investors should carefully consider all the information contained in this Prospectus including the risk factors described below, before deciding to invest in the Bonds. The risks discussed below are believed to be listed in the order of their importance. The Company's business, financial condition and results of operations could be materially adversely affected by any of these risk factors. The Company regularly reviews the risks detailed below and provides, whenever possible, risk mitigation and business strategies to address such risks, however, note that there are certain risks that are beyond the control of the Company and are inherent to running a business. RISKS RELATED TO THE BUSINESS Industry Risks Ayala operates in four key areas: real estate and hotels, financial services, telecommunications and a portfolio of other investments which includes water utilities, electronics and information technology, as well as automotive and international operations. These areas have inherent risks, to wit:

Risk Factors

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Real Estate and Hotels The Philippine property market has, in recent years, shown remarkable year-on-year growth, in terms of the number of development projects being undertaken. The steady rise in the Philippine economy over the past several years, coupled with massive interest from Overseas Filipino Workers wanting to establish permanent or temporary residence in the Philippines, is expected to support this growth. Construction is widespread not only in Metro Manila but also in outlying provinces and other major cities as well. The current property boom indicates that the industry is now recovering from the effects of the Asian Financial Crisis. Any changes in demand, however, may result in a glut, which may again depress prices, similar to what happened in 1997. Adoption of Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This Philippine Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials, and where the risks and reward of ownership are transferred to the buyer on a continuous basis, will also be accounted for based on stage of completion. The adoption of this Philippine Interpretation will be accounted for retrospectively, and will result to restatement of prior period financial statements. The adoption of this Philippine Interpretation may significantly affect the determination of the revenue from real estate sales and the corresponding costs, and the related trade receivables, deferred tax liabilities and retained earnings accounts. The Group is in the process of quantifying the impact of adoption of this Interpretation and will disclose the impact when it becomes effective in 2012. Financial Services The Philippine banking industry has seen a significant increase in the number of commercial banks, especially since the liberalization of operations by foreign banks. The number of commercial banks increased from approximately 30 prior to liberalization to more than 50. However, as of end 2007, the number of universal and commercial banks had declined to 36 as a result of mergers and closures. Competition has remained intense despite the industry consolidation. Corporate lending remained very competitive resulting in even narrower spreads. Pockets of growth were seen in the middle corporate market segment; yields in this segment were wider but continued to be highly vulnerable to economic shocks. Telecommunications The Philippine telecommunications industry, particularly wireless communications, has been notably competitive as competitors have sought to increase market share by attracting new subscribers. The principal players in Philippine telecommunications are Globe, Philippine Long Distance Telephone Company (“PLDT”) and its wireless subsidiary Smart Communications, Inc. (“Smart”) and Digitel Communications Philippines, Inc. (“Digitel”) which launched its wireless “Sun Cellular” mobile service in 2003. Other players include Bayan Telecommunications Philippines, Inc. (“Bayantel”) and Express Telecommunications Company (“Extelcom”), which are both licensed to provide wireless mobile services, and Infocom Communications Network, Inc. a licensed wireless trunked radio service operator. While wireless subscriber growth is expected to continue, it may not continue to grow at the same rate as in the past. Further reductions in rates, wider penetration into lower-usage subscriber segments, and intense competition may also result in declining average revenues per subscriber.

Risk Factors

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Other industry considerations include the capital-intensive nature of the business, the rapid pace of change in telecommunications technology, and the regulated nature of the industry. Others Ayala’s portfolio of investments includes an investment in a water utility business, MWC. MWC operates in a highly regulated environment under the terms of the Concession Agreement entered into with the Government. Among others, the operations of this business will be materially affected by MWC’s ability to implement rate increases, meet capital expenditure requirements and concession fee payments (to the Government), comply with operating and performance targets specified under the Concession Agreement, and the availability of adequate raw water supply. Ayala is also involved in electronics contract manufacturing through the Integrated Microelectronics, Inc. (“IMI”), which is engaged in electronics assembly and product and engineering design. IMI’s principal products comprise printed circuit board assemblies (“PCBAs”), computer peripherals and storage devices and other electronic sub-assemblies for export to various consumer and industrial applications. IMI’s principal customers operate in a highly competitive global environment dominated by several large participants. Global downturns in industry demand and increasing competition from countries such as China could also materially impact IMI’s operating performance moving forward. Azalea Technology Investments, Inc. (“Azalea Technology”) is Ayala’s investment vehicle in mobile and e-commerce opportunities, communications, technologies and other IT-enabled services. The industries in which Azalea Technology’s investment companies operate are emerging industries which, while offering significant growth opportunities, are also exposed to significant technology risks and competition. There can be no assurance that these investments will deliver Ayala with adequate returns. Ayala also maintains investments in the automotive industry through its ownership of car dealerships for Honda passenger cars and Isuzu Asian utility vehicles, commercial vehicles and trucks. These operations depend largely on the market demand for commercial vehicles and passenger cars, as well as the market acceptance of new product offerings. Recently, Ayala made investments in business process outsourcing to take advantage of the growth potential of the sector. The country’s supply of skilled personnel for BPO may not be sufficient to fill the sector’s growing demand for labor, which can pose challenges in recruitment and employee retention, and provide pressure on training and wage cost for BPO companies. Through AG Holdings Ltd., Ayala also makes overseas real estate investments within the Asia-Pacific region and the United States. Global downturns in the property market will materially affect the ability of these investments to deliver their anticipated returns. Competition All of Ayala’s main operating subsidiaries and affiliates operate in highly competitive industries. Changes in Philippine laws such as increased liberalization and tariff reductions may result in lowering the barriers to entry in industries where Ayala’s subsidiaries and affiliates operate resulting in increased competition. No assurance can be given that increased competition in the various industry segments will not adversely affect Ayala’s financial condition and results of operations.

Risk Factors

17

Foreign Exchange Risk Ayala incurs foreign exchange risk as part of its business as it may elect to finance its investments in foreign currency. To manage this exposure, Ayala may utilize short- to medium-term hedges. In addition, the Company maintains part of its liquid assets in short-term foreign currency denominated investments. Intensive Capital Requirements A number of Ayala’s principal operating companies operate in highly capital intensive industries where it is critical to be able to keep up considerable levels of capital investments in order to maintain market position and sustain growth. These industries include property development, telecommunications and water utilities. Ayala believes however that its principal operating companies will be able to meet their respective future capital expenditure requirements from their own internally generated cash flows and borrowing capacity with minimal or no additional funding support from Ayala. Government Regulation A material part of Ayala’s businesses including real estate, banking, telecommunications and water utilities, operate in an environment with various degrees of Government regulation. The introduction of inconsistent or unpredictable application of, or changes in, Government regulations may from time to time materially affect the operations of Ayala’s businesses. Litigation Being one of the largest and most diverse companies in the Philippines, Ayala is exposed to the risk of legal proceedings against it. Data Management Systems Ayala relies on the latest information communication technologies for its operations and the management of data. There is a risk that these systems may fail for reasons such as natural calamity. Holding Company Structure As a holding company, Ayala operates principally through its subsidiaries and affiliates. Claims of creditors of Ayala’s subsidiaries and affiliates, including trade creditors, bank lenders and other creditors, will have priority over any claims of Ayala and holders of the Bonds with respect to the assets of such subsidiaries and affiliates. Substantially all of Ayala’s cash flow is dependent on cash distributions from, or the proceeds of the realization of, its investments in subsidiaries and affiliates. The ability of Ayala’s subsidiaries and affiliates to pay dividends to stockholders is subject to applicable law and restrictions contained in debt instruments of such subsidiaries and affiliates and may also be subject to deduction for taxes. In addition, the declaration of dividends by Philippine banks is subject to approval by the BSP, thereby affecting the payment of dividends from Ayala’s banking affiliate, the BPI Group, to Ayala. To the extent possible, Ayala monitors and supervises the performance of its subsidiaries and affiliates to help generate or improve such cash distributions and proceeds. There is no assurance, however, that Ayala can generate sufficient cash flow from dividends or other payments to allow it to meet its obligations under the Bonds. Any shortfall would have to be made up from other available sources of cash, such as a sale of investments or proceeds from other refinancing activities available to Ayala. Ayala, its subsidiaries and affiliates have a substantial number of contractual and working arrangements with each other. While Ayala believes that all contractual arrangements between and among itself, its subsidiaries and affiliates, are entered into on an arms-length basis, there can be no assurance that any

Risk Factors

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such contract is on terms as favorable as could have been obtained in a transaction with an unrelated third party. There is also no assurance that future working arrangements between related parties will not involve conflicts of interest. The Company depends significantly on the services o f members of its management team, and the departure of any of these persons is not expected t o cause any significant effect on its operating results. The Company's success depends significantly on the continued individual and collective contributions of each member of its management team. Most of its managers have acquired a high level of technical expertise through many years of experience working with the Company. The loss of the services of any member of the Company's senior management, and the inability to immediately hire and retain experienced management personnel, while it could have an adverse effect on its business and results of operations, is not expected to be material. Unauthorized, negligent or fraudulent acts of any o f the Company’s employees may result in financial or economic losses for the company. As part of its overall strategy, the Company has empowered its managers to perform and/or engage in certain transactions with third parties. The Company tries to maintain an appropriate balance between internal controls and organizational empowerment. While the Company has put in place internal controls (such as limits in approval authority, regular audits, system controls and appropriate penalties for violations), certain employees may act negligently or in bad faith, commit certain acts which may be detrimental to the interests of the Company. Management of Risks Related to the Business While Ayala is sometimes portrayed in the media as a family corporation, it must be stressed that its Board of Directors represents a mix of business, legal and finance competencies, with each director capable of adding value and rendering independent judgment in relation to the formulation of sound corporate policies. Directors are committed to the collective decision making processes of the Board. Decision-making at the Board level adheres to an objective process that does not undermine the independence and integrity of judgment of each individual director. Good corporate governance is the cornerstone of Ayala’s sustained success over the past 174 years. The Company’s primary mission and mandate is to create long-term value for its business and stakeholders. In pursuit of this, Ayala has committed to the highest level of governance throughout the organization as well as fostering a corporate culture of integrity and empowering leadership. Ayala constantly reviews and revises its human resource policies and employee benefits structures to ensure that its employees, whether rank-and-file or management, experience the best possible working environment, thereby reducing employee turn-over. The Company also has processes in place for the identification and hiring of the best available talent, whether inside or outside Ayala. As part of its succession planning initiatives, the Company has instituted various employee development programs, including cross-posting, foreign immersions, educational assistance, mentoring and leadership development training. These programs equip the middle-managers with the right tools needed not only for their present responsibilities, but also those required for them to assume higher positions in the organization. These programs minimize the risks associated with the turn-over of experienced management, as Ayala would be able to find competent people to take their place. In terms of internal control risks, control mechanisms, systems and policies had been put in place in order to address any control lapses. The Audit and Risk Committee sees to it that these internal control risks are properly addressed through strict compliance with these system controls, policies and procedures.

Risk Factors

19

Moreover, Ayala has a culture and systems for transparency, corporate governance, disclosure and checks-and-balances between various decision-making personnel that minimize the risks described above. Ayala applies conservative financial and operational controls in the management of its business risks. Organizationally, it is the lead directors/company presidents/chief risk officers who have ultimate accountability and responsibility to ensure risk management initiatives at subsidiaries are aligned with Ayala and are responsible for submission of risk reports to ensure key risks are well-understood, assessed/measured and reported. Providing support are the internal audit units who regularly process audits and process improvements. The Audit and Risk Committee of the Board meets regularly and performs its oversight role in managing the risks involved in the operations of Ayala. In addition, a Chief Risk Officer oversees the entire risk management function and is responsible for overall continuity. In terms of internal control risks, control mechanisms, systems and policies had been put in place in order to address any control lapses. The Audit and Risk Committee sees to it that these internal control risks are properly addressed through strict compliance with these system controls, policies and procedures. Moreover, Ayala has a culture and systems for transparency, corporate governance, disclosure and checks-and-balances between various decision-making personnel that minimize the risks described above. With respect to legal proceedings, Ayala’s Senior Counsel, General Counsel and Corporate Governance & Legal Affairs group analyze its transactions and activities to ensure compliance with law, regulation, and contractual obligations. In the event that material litigation against it does arise, Ayala assesses the merits of the case and its impact on company operations. If needed, Ayala retains external counsel to help in the analysis or handle the actual litigation of the case. Ayala has a Business Continuity Plan composed of, among other components, the ICT Systems Continuity Plan and the Disaster Recovery Plan. The Company backs-up data in its servers on a daily basis. It has a back-up site which is production-ready, meaning that all productions systems in its principal office may be recovered in the event said office becomes unavailable due to a disaster. Critical systems are recoverable within one to two hours; regular systems can be recovered within 24 hours. Ayala continually invests in business continuity technology in order to reduce the recovery time of servers at the back-up site, maximize the reliability, efficiency and manageability of the back-up system, and ensure the automatic back-up of all data stored in Company desktops and laptops. RISKS RELATED TO THE COUNTRY Ayala’s businesses will be influenced by the general political and economic situation of the Philippines. Any political and/or economic instability in the future may have a negative effect on Ayala’s financial condition and result of operations.

Any political or social instability in the future m ay have an effect on the financial results of the Company. The Philippines has from time to time experienced political, social and military instability. In February 1986, a peaceful civilian and military uprising ended the 21-year rule of President Ferdinand Marcos and installed Corazon Aquino as President of the Philippines. Between 1986 and 1989, there were a number of attempted coups d’état against the Aquino administration, none of which was successful. Political conditions in the Philippines were generally stable during the mid to late 1990s following the election of Fidel Ramos as President in 1992. However, during 2000, his successor, Joseph Estrada, was subject to allegations of corruption. This led to impeachment proceedings, mass public protests in

Risk Factors

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Manila, the withdrawal of support of the military and Estrada’s eventual resignation from office. Following Estrada’s resignation, the then Vice President, Gloria Macapagal-Arroyo, was sworn in as President on January 20, 2001. In 2005, the country again experienced political tension following President Macapagal-Arroyo's admission that she called a high ranking official of the Commission on Elections during the May 2004 election campaign. This was followed by the resignation of the Administration’s key Cabinet officials as well as the filing of three impeachment complaints alleging that she rigged the 2004 elections, none of which prospered. A new impeachment complaint was filed on October 5, 2007 against President Arroyo in connection with bribery allegations involving a government contract awarded to a Chinese telecommunications company. Thus far, no substantial evidence has been found directly linking President Arroyo to the alleged bribery. On November 29, 2007, a Philippine Senator and former lieutenant, Antonio Trillanes IV led a group of military officers in walking out of a trial for the occupation of the Oakwood Premier Ayala Center and seizing a hotel in Makati to demand President Arroyo to step down. The group peacefully surrendered after a 6-hour standoff with government forces. The next presidential elections will be held in May 10, 2010 and the Filipino people are hoping for political stability given the change in the administration. Overall, any future economic, political or social instability in the Philippines may affect Ayala’s business, financial condition or results of operations. A slowdown in the economic growth, coupled with hig h inflation and interest rates in the Philippines, could materially adversely affect the Company’s business. In the past, the Philippines has experienced periods of slow or negative growth, high inflation, significant depreciation of the Philippine peso and electricity shortages. The regional Asian financial crisis in 1997 also affected the Philippine economy resulting in, among others, the depreciation of the Philippine peso, higher interest rates, slower growth and a reduction in the country’s credit ratings. These affected the ability of a number of Philippine companies to meet their debt servicing obligations. While the Philippine economy registered economic growth since the Asian financial crisis, the economy faced significant challenges such as a ballooning budget deficit, inflation, commodity and oil price hikes, volatile exchange rates and a relatively weak banking sector. Overall public sector performance also remained mixed, with the government encumbered with sizable guaranteed and non-guaranteed contingent liabilities that complicate fiscal prospects. Despite entrenched special interests, Government managed to address certain challenges. In November 2005, a new VAT law took effect, expanding VAT coverage to previously exempt products and services; and in February 2006, the Government increased the VAT rate to 12% from 10%. Gross domestic product (“GDP”) growth in the fourth quarter of 2009 was 1.8%, bringing the 2009 full year GDP growth to 0.9% versus a 3.8% growth registered in 2008. While the Philippine economy performed relatively well in 2008, macroeconomic conditions significantly changed in 2009 with the onset of the financial crisis and global economic downturn. In 2009, global developments also affected the Philippine financial markets. The United States (US) is a major trading partner of the Philippines, and a slowdown in the US economy adversely affected the Philippine economy as well. Recent global events also affected the Philippine stock market, as well as the debt capital market. It is not certain how the global events will impact the Philippines in the long run. While a new VAT law is in place and the Government has achieved lower budget deficits, there is no assurance that the Government’s fiscal position will continue to improve. Should economic conditions of the Philippines deteriorate, such deterioration could affect Ayala’s financial condition and results of operations.

Risk Factors

21

Depreciation in the value of the Peso against the U .S. dollar and other currencies may affect the Company's business. Ayala’s revenues are predominantly denominated in Pesos, while some investment initiatives and certain expenses including debt obligations, are denominated in currencies other than Pesos (principally U.S. Dollars). To fund its foreign currency requirements, Ayala taps the international market to raise needed funds and capitalize on the offshore’s flexibility in volume and in pricing. To hedge against this minimal foreign currency exposure, Ayala utilizes short to medium term hedges to protect itself from any Peso depreciation. Furthermore, Ayala also keeps short term U.S. Dollar investments as part of its liquid assets. During the last decade, the Philippines, from time to time, has experienced devaluations of the Peso and limited foreign exchange. From 1996 to 2004, the Peso depreciated at a rate of 10% per annum from =P26.288 per U.S. Dollar at end-1996 to =P56.341 at end-2004. Owing to the implementation of the new VAT law as well as strong inflows of OFW remittances, the Peso strengthened to =P49.03 per U.S. Dollar at end-2006, and further rose to =P41.28 per U.S. Dollar by end-2007. The peso managed to appreciate to an 8-year high during the first quarter of 2008, reaching =P40.330 on February 27, 2008. However, the local currency's momentum stalled during the height of the Senate's inquiry on the corruption charges leveled by whistleblower Jun Lozada on key members of the Arroyo Administration regarding the NBN-ZTE Broadband deal. The peso made a slight recovery afterwards, but the unexpected rise in global fuel and food prices early in the second quarter of 2008 as investors channeled their liquidity towards commodities drove importation costs higher, undermining the peso's interest rate differential advantage versus the U.S. dollar. Subsequent risk aversion following the collapse of several financial institutions in the U.S. and Europe in late 2008 has pushed the currency pair back to the =P47.000 level. However, with the robust and continued growth of foreign currency remittances primarily from the overseas Filipino workers in 2009 and in early 2010 and the generally weaker US dollar, the Peso has been able to strengthen further closing at =P45.170 as of March 31, 2010. There can be no assurance that future Peso devaluations will not occur or that the availability of foreign exchange will not be limited. Recurrence of these conditions may affect Ayala’s financial condition and results of operations. Management of Risks Related to the Country The Company has been able to overcome major crises brought about by economic and political factors affecting the country. The strong corporate governance structure of the Company and its prudent management team are the foundations for its continued success. Ayala also constantly monitors its macroeconomic risk exposure, identifies unwanted risk concentrations and modifies its business policies and activities to navigate such risks. Severe macroeconomic contractions may conceivably lead Ayala to tweak its investment decisions to meet the downturn. As a holding company, Ayala will affirm the principles of fiscal prudence and efficiency in operations to the companies in which it has a stake in. RISKS RELATED TO THE BONDS Liquidity Risk The Philippine securities markets are substantially smaller, less liquid and more concentrated than major securities markets. The Company cannot guarantee that the market for the Bonds will always be active or liquid. Even if the Bonds are listed on the PDEx, trading in securities such as the Bonds may be subject to extreme volatility at times, in response to fluctuating interest rates, developments in local and international capital markets and the overall market for debt securities among other factors. There is no assurance that the Bonds may be easily disposed at prices and volumes at instances best deemed appropriate by their holders.

Risk Factors

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Pricing Risk The Bond’s market value moves (either up or down) depending on the change in interest rates. The Bonds when sold in the secondary market are worth more if interest rates decrease since the Bonds have a higher interest rate relative to the market. Likewise, if the prevailing interest rate increases, the Bonds are worth less when sold in the secondary market. Therefore, an investor faces possible loss if he decides to sell. Retention of Ratings Risk There is no assurance that the rating of the Bonds will be retained throughout the life of the Bonds. The rating is not a recommendation to buy, sell, or hold securities and may be subject to revision, suspension, or withdrawal at any time by the assigning rating organization. Bonds have no Preference under Article 2244(14) of the Civil Code No other loan or other debt facility currently or to be entered into by the Issuer is notarized, such that no other loan or debt facility to which the Issuer is a party shall have preference of priority over the Bonds as accorded to public instruments under Article 2244(14) of the Civil Code of the Philippines, and all banks and lenders under any such loans or facilities have waived the right to the benefit of any such preference or priority. However, should any bank or bondholder hereinafter have a preference or priority over the Bonds as a result of notarization, then the Issuer shall at the Issuer’s option, either procure a waiver of the preference created by such notarization or equally and ratably extend such preference to the Bonds.

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UUSSEE OOFF PPRROOCCEEEEDDSS

Ayala expects to raise gross proceeds amounting to approximately up to Ten Billion Pesos (=P10,000,000,000) from the Offer. The following are the estimated expenses to be incurred in relation to the Offer:

SEC Registration and Legal Research Fee =P 3,598,125 Publication Fee =P 100,000 Documentary Stamp Taxes =P 50,000,000 Underwriting Fees =P 40,000,000 Ratings Fees =P 4,500,000 Estimated Professional Expenses =P 3,300,000 Listing Fees =P 50,000 Trustee Fees =P 15,000 Registry Fees =P 75,000 Other related expenses =P 200,000 Total =P 101,838,125

Aside from the fees enumerated above, the Company will be paying the following estimated annual fees related the Bonds:

1. PhilRatings annual monitoring fee of =P500,000 2. Metropolitan Bank and Trust Company – Trust Banking Group as trustee to the Bondholders

annual retainer fee of =P100,000 net of tax, in semi-annual payments. 3. PDTC registry maintenance annual fee of =P250,000 4. BPI Stock Transfer Office as paying agent annual fee of =P60,000 5. PDTC annual listing maintenance fee of =P150,000

The net proceeds from the Offer is estimated to be =P9,898,161,875 after deducting expenses related to the Offer. The net proceeds of =P9,898,161,875 shall be used by the company to fund its general working capital account to be used for its operations as a holding company. As a holding company, Ayala is consistently seeking opportunities for expansion both through organic growth of the existing lines of businesses as well as through transactions and acquisitions that would add value to the company and to the Ayala Group as a whole. Although there can be no assurance regarding what and when opportunities may arise, Ayala evaluates such opportunities on an ongoing basis. Ayala is presented from time to time with opportunities to invest in new business areas and it will continue to consider such opportunities to the extent that such businesses would contribute to the overall strategic objectives of the Group. Ayala seeks to ensure that the Ayala Group maintains its commitment to its business activities in the Philippines and to explore possible international initiatives on a selective and opportunistic basis. Ayala intends to build on its leadership position in the Ayala Group's existing core businesses in real estate, financial services and telecommunications, and actively manage its portfolio of other investments and assets under AC Capital with a view toward maximum value creation and realization. Ayala is presented from time to time with opportunities to invest in new business areas, such as but not limited to the power generation and service (e.g. BPO) industries, and will continue to consider such opportunities to the extent that such businesses would contribute to the overall strategic objectives of the Ayala Group.

Use of Proceeds

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Other disclosures The Company intends neither to use any material amount of the proceeds to reimburse any officer, director, employee or shareholder for service rendered, assets previously transferred, money loaned or advanced. In the event of any substantial deviation / adjustment in the planned uses of proceeds, the Company shall inform the Securities and Exchange Commission and the stockholders within thirty (30) days prior to its implementation.

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PPLLAANN OOFF DDIISSTTRRIIBBUUTTIIOONN Ayala plans to issue the Bonds on a lump-sum basis through designated Joint Lead Underwriters. UNDERWRITING OBLIGATIONS OF THE JOINT LEAD UNDERWRI TERS AND BOOKRUNNERS BDO Capital & Investment Corporation (“BDO Capital”), BPI Capital Corporation (“BPI Capital”), Citicorp Capital Philippines, Inc. (“Citicorp Capital”), First Metro Investment Capital Corporation (“FMIC”), The Hongkong and Shanghai Banking Corporation Limited (“HSBC”), ING Bank, N.V., Manila Branch (“ING”), RCBC Capital Corporation (“RCBC Capital”) and Standard Chartered Bank (“SCB”) (collectively referred to as the “Joint Lead Underwriters”), pursuant to an Underwriting Agreement with Ayala (the “Underwriting Agreement”) executed on April 16, 2010, have agreed to act as the Joint Lead Underwriters for the Offer and as such, distribute and sell the Bonds at the Issue Price, and have also committed to underwrite up to Ten Billion Pesos (=P10,000,000,000) on a firm basis, in either case subject to the satisfaction of certain conditions and in consideration for certain fees and expenses. BPI Capital is the sole Issue Manager for this transaction. The Joint Lead Underwriters will receive a fee of 0.40%, grossed up for gross receipts tax, on the underwritten principal amount of the Bonds issued. Such fee shall be inclusive of underwriting, and participation commissions. The amount of the commitments of the Joint Lead Underwriters is as follows: BDO Capital & Investment Corporation =P2,250,000,000 BPI Capital Corporation 2,400,000,000 Citicorp Capital Philippines, Inc, 850,000,000 First Metro Investment Corporation 1,500,000,000 The Hongkong and Shanghai Banking Corporation Limited 1,000,000,000 ING Bank N.V., Manila Branch 500,000,000 RCBC Capital Corporation 1,000,000,000 Standard Chartered Bank 500,000,000 TOTAL =P10,000,000,000 There is no arrangement for the Joint Lead Underwriters to put back to Ayala any unsold Bonds. The Underwriting Agreement may be terminated in certain circumstances prior to payment being made to Ayala of the net proceeds of the Bonds. The Joint Lead Underwriters are duly licensed by the SEC to engage in underwriting or distribution of the Bonds. The Joint Lead Underwriters may, from time to time, engage in transactions with and perform services in the ordinary course of its business for Ayala or other members of the Ayala Group of which Ayala forms a part. BPI Capital Corporation is the wholly-owned investment bank subsidiary of Bank of the Philippine Islands. BPI Capital is an investment house focused on corporate finance and the securities distribution business. It began operations as an investment house in December 1994. BPI Capital Corporation has an investment house license. Except for BPI Capital, the Joint Lead Underwriters have no direct relations with Ayala in terms of ownership by either of their respective major stockholder/s. BPI Capital is a wholly owned subsidiary of BPI, an affiliate of Ayala, which has an effective ownership of 33.5% in BPI as of December 31, 2009. None of the Joint Lead Underwriters has the right to designate or nominate a member of the Board of Ayala.

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SALE AND DISTRIBUTION (a) The distribution and sale of the Bonds shall be undertaken by the Joint Lead Underwriters who shall

sell and distribute the Bonds to third party buyers/investors. Nothing herein shall limit the rights of the Joint Lead Underwriters from purchasing the Bonds for their own respective accounts.

(b) The obligations of each of the Joint Lead Underwriters will be several, and not joint and solidary, and

nothing in the Underwriting Agreement shall be deemed to create a partnership or joint venture between and among any of the Joint Lead Underwriters. Unless otherwise expressly provided in the Underwriting Agreement, the failure by any of the Joint Lead Underwriters to carry out its obligations thereunder shall not relieve any other Joint Lead Underwriter of its obligations thereunder, nor shall any Joint Lead Underwriter be responsible for the obligations of any other Joint Lead Underwriter thereunder.

DESIGNATED SHARES AND ALLOCATIONS Each Joint Lead Underwriter may take on any portion up to the full amount of the Issue, as determined by Ayala. TERM OF APPOINTMENT The engagements of the Joint Lead Underwriters, as well as the Issue Manager shall subsist so long as the SEC Permit remains valid, unless otherwise terminated by Ayala, the Issue Manager or the Joint Lead Underwriters. MANNER OF DISTRIBUTION The Joint Lead Underwriters shall, at their discretion, determine the manner by which proposals for subscriptions to, and issuances of, Bonds shall be solicited, with the primary sale of Bonds to be effected only through the Joint Lead Underwriters. OFFER PERIOD The Offer Period shall commence on April 20, 2010 and end on April 26, 2010. APPLICATION TO PURCHASE Applicants may purchase the Bonds during the Offer Period by submitting to the Joint Lead Underwriters a properly completed Application to Purchase, together with two (2) signature cards, and the full payment of the purchase price of the Bonds in the manner provided therein. Corporate and institutional applicants must also submit, in addition to the foregoing, a copy of their SEC Certificate of Registration of Articles of Incorporation and By-Laws, Articles of Incorporation, By-Laws, and the appropriate authorization by their respective boards of directors and/or committees or bodies authorizing the purchase of the Bonds and designating the authorized signatory(ies) thereof. Individual applicants must also submit, in addition to the foregoing, a photocopy of any one of the following identification cards (“ID”): passport/driver’s license/postal ID, company ID, SSS/GSIS ID and/or Senior Citizen’s ID. A corporate and institutional investor who is exempt from or is not subject to the aforesaid withholding tax shall be required to submit the following requirements to the Registrar, subject to acceptance by the Issuer as being sufficient in form and substance: (i) certified true copy of the tax exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue; (ii) a duly notarized undertaking, in the prescribed from, declaring and warranting its tax exempt status, undertaking to immediately notify the Issuer of any suspension or revocation of the tax exemption certificates and agreeing to indemnify and hold the Issuer free and harmless against any claims, actions, suits, and liabilities resulting from the non-

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withholding of the required tax; and (iii) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities, provided further, that all sums payable by the Issuer to tax exempt entities shall be paid in full without deductions for taxes, duties assessments or government charges subject to the submission by the Bondholder claiming the benefit of any exemption of reasonable evidence of such exemption to the Registrar. Completed Applications to Purchase and corresponding payments must reach the Joint Lead Underwriters prior to the end of the Offer Period, or such earlier date as may be specified by the Joint Lead Underwriters. Acceptance by the Joint Lead Underwriters of the completed Application to Purchase shall be subject to the availability of the Bonds and the acceptance by Ayala. In the event that any check payment is returned by the drawee bank for any reason whatsoever, the Application to Purchase shall be automatically canceled and any prior acceptance of the Application to Purchase is deemed revoked. MINIMUM PURCHASE A minimum purchase of Fifty Thousand Pesos (=P50,000) shall be considered for acceptance. Purchases in excess of the minimum shall be in integral multiples of Ten Thousand Pesos (=P10,000). ALLOTMENT OF THE BONDS If the Bonds are insufficient to satisfy all Applications to Purchase, the available Bonds shall be allotted in accordance with the chronological order of submission of properly completed Applications to Purchase on a first-come, first-served basis, subject to Ayala’s right of rejection. REFUNDS If any application is rejected or accepted in part only, the application money or the appropriate portion thereof will be returned without interest to such applicant through the relevant Joint Lead Underwriter from whom such application to purchase the Bonds was made. UNCLAIMED PAYMENTS Any payment of interest on, or the principal of the Bonds which remain unclaimed after the same shall have become due and payable, shall be held in trust by the Paying Agent for the Bondholders at the latter’s risk. PURCHASE AND CANCELLATION The Issuer may purchase the Bonds at any time in the open market or by tender or by contract at any price without any obligation to make pro-rata purchases from all Bondholders. Bonds, which have been redeemed, may be re-issued by Ayala under such terms and conditions as may be approved by Ayala’s Board of Directors. REGISTRY OF BONDHOLDERS The Bonds shall be issued in scripless form and will be eligible for trading under the Scripless book-entry system of the PDTC. A Master Certificate of Indebtedness representing the Bonds sold in the Offer shall be issued to and registered in the name of the Trustee, on behalf of the Bondholders. Legal title to the Bonds shall be shown in the Register of Holders to be maintained by the designated registrar for the Bonds. Initial placement of the Bonds and subsequent transfers of interests in the Bonds shall be subject to applicable Philippine selling restrictions prevailing from time to time. Ayala will cause the Register of Bondholders to be kept at the specified office of the Registrar. The names and addresses

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of the Bondholders and the particulars of the Bonds held by them and of all transfers of Bonds shall be entered into the Register of Bondholders. EXPENSES All out-of-pocket expenses, including but not limited to, registration with the SEC, credit rating, printing, publicity, communication and signing expenses incurred by the Issue Manager and the Joint Lead Underwriters in the negotiation and execution of the transaction will be for Ayala’s account irrespective of whether the transaction contemplated herein is completed. Such expenses are to be reimbursed upon presentation of a composite statement of account.

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DDEETTEERRMMIINNAATTIIOONN OOFF OOFFFFEERR PPRRIICCEE The Bonds shall be issued on a fully-paid basis and at an issue price that is at par.

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DDEESSCCRRIIPPTTIIOONN OOFF TTHHEE BBOONNDDSS

The following does not purport to be a complete listing of all the rights, obligations, or privileges of the Bonds. Some rights, obligations, or privileges may be further limited or restricted by other documents. Prospective investors are enjoined to carefully review the Articles of Incorporation, By-Laws and resolutions of the Board of Directors and Shareholders of Ayala, the information contained in this Prospectus, the Trust Indenture, Underwriting Agreement, and other agreements relevant to the Offer. The issue of up to =P10,000,000,000 aggregate principal amount of 7.20% p.a. fixed rate bonds (the “Bonds”) was authorized by a resolution of the Board of Directors of Ayala Corporation (“Ayala” or the “Issuer”) in a meeting held on March 15, 2010. The Bonds shall be constituted by a Trust Indenture Agreement (the “Trust Indenture”) to be executed on April 16, 2010 between Ayala and Metropolitan Bank and Trust Company – Trust Banking Group (the “Trustee” which expression shall wherever the context permits, include all other persons or companies for the time being acting as trustee or trustees under the Trust Indenture). The description of the terms and conditions of the Bonds set out below includes summaries of, and is subject to, the detailed provisions of the Trust Indenture. A registry and paying agency agreement shall be executed on April 16, 2010 (the “Registry and Paying Agency Agreement”) in relation to the Bonds between Ayala and Bank of the Philippine Islands – Stock Transfer Office (the “Paying Agent”), and Philippine Depository and Trust Corporation as registrar (the “Registrar”) and Ayala respectively. The Bonds will mature on April 30, 2017, unless earlier redeemed by Ayala pursuant to the terms thereof and subject to the provisions on exercise of the Bondholder’s (as defined below) Put Option, redemption and payment below. Copies of the Trust Indenture, the Registry and Paying Agency Agreement are available for inspection during normal business hours at the specified offices of the Trustee. The holders of the Bonds (the “Bondholders”) are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Indenture and are deemed to have notice of those provisions of the Registry and Paying Agency Agreement applicable to them. 1. FORM, DENOMINATION AND TITLE

(a) Form and Denomination

The Bonds are in scripless form, and will be issued and traded or redeemed in accordance with the Bondholder’s Put Option (as defined below), in denominations of =P50,000, as a minimum, and in integral multiples of =P10,000 thereafter.

(b) Title

Legal title to the Bonds will be shown in the register of Bondholders (the “Register of Bondholders”) maintained by the Registrar. A notice confirming the principal amount of the Bonds purchased by each applicant in the Offering will be issued by the Registrar to all Bondholders following the Issue Date. Upon any assignment, title to the Bonds will pass by recording of the transfer from the transferor to the transferee in the electronic Register of Bondholders maintained by the Registrar. Settlement in respect of such transfer or change of title to the Bonds, including the settlement of any cost arising from such transfers, including but not limited to documentary stamps taxes, if any, arising from subsequent transfers, shall be for the account of the relevant Bondholder.

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(c) Bond Rating

The Bonds have been rated PRS Aaa by Philippine Ratings Services Corporation (“PhilRatings”) on 25 March 2010. According to PhilRatings, obligations rated PRS Aaa are of the highest quality with minimal credit risk. In coming with the rating, PhilRatings considered the following factors present in the Company: (i) highly diversified and generally self-sustaining investments portfolio, (ii) more than adequate liquidity, (iii) well managed debt profile, (iv) lowered profitability although favorable growth prospects and ample debt cover will continue over the long-term, (v) multiple layers of financial flexibility, (vi) strong and well respected brand equity, (vii) conservative but anticipatory management stance, and (vii) flexible management team. The rating was based on available information at the time it was given and is subject to regular annual reviews, or more frequently as market developments may dictate, for as long as the Bonds are outstanding. The rating may be changed at any time should PhilRatings determine that circumstances warrant a change.

2. TRANSFER OF BONDS

(a) Register of Bondholders

Ayala will cause the Register of Bondholders to be kept by the Registrar, in electronic form. The names and addresses of the Bondholders and the particulars of the Bonds held by them and of all transfers of Bonds shall be entered into the Register of Bondholders. As required by Circular No. 428-04 issued by the Bangko Sentral ng Pilipinas (“BSP”), the Registrar shall send each Bondholder a written statement of registry holdings at least every quarter (at the cost of Ayala) and a written advice confirming every receipt or transfer of the Bonds that is effected in the Registrar’s system (at the cost of the relevant Bondholder). Such statement of registry holdings shall serve as the confirmation of ownership of the relevant Bondholder as of the date thereof. Any requests of Bondholders for certifications, reports or other documents from the Registrar, except as provided herein, shall be for the account of the requesting Bondholder. No transfers of the Bonds may be made during the period commencing on a Record Date (as defined in 4(a) below) until the next Interest Payment Date.

(b) Transfers; Tax Status

Bondholders may transfer their Bonds at anytime, regardless of tax status of the transferor vis-a-vis the transferee. Should a transfer between Bondholders of different tax status occurs on a day which is not an Interest Payment Date, tax exempt entities trading with non tax exempt entities shall be treated as non-tax exempt entities for the Interest Period within which such transfer occurred. A Bondholder claiming tax-exempt status is required to submit a written notification of the sale or purchase to the Trustee, including the tax status of the transferor or transferee, as appropriate, together with the supporting documents specified under “Payment of Additional Amounts; Taxation”, below, within three (3) days from the settlement date for such transfer. Transfers taking place in the Register of Bondholders after the Bonds are listed on PDEx may be allowed between taxable and tax-exempt entities without restriction provided the same are in accordance with the relevant rules, conventions and guidelines of PDEx and the depository.

(c) Secondary Trading of the Bonds

Ayala intends to list the Bonds in PDEx for secondary market trading or such other securities exchange licensed as such by the SEC on which the trading of debt securities in significant volumes occurs. Secondary market trading and settlement in PDEx shall follow the applicable PDEx rules, conventions and guidelines, including rules, conventions and guidelines governing trading and settlement between bondholders of different tax status.

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3. RANKING The Bonds constitute direct, unconditional, unsecured and unsubordinated Peso-denominated obligations of Ayala and will rank pari passu and rateably without any preference or priority amongst themselves and at least pari passu with all other present and future unsecured and unsubordinated obligations of the Ayala, other than obligations preferred by law. 4. INTEREST

(a) Interest Payment Dates

Each Bond bears interest on its principal amount from and including Issue Date at the rate of 7.20% per annum, payable quarterly in arrears on April 30, July 30, October 30 and January 30 in each year (each of which, for purposes of this clause is an “Interest Payment Date”) commencing on July 30, 2010 or the subsequent Business Day without adjustment if such Interest Payment Date is not a Business Day. The last Interest Payment Date shall fall on the Maturity Date. The cut-off date in determining the existing Bondholders entitled to receive interest or principal amount due shall be the day ten (10) Business Days prior to the relevant Interest Payment Date (the “Record Date”), which shall be the reckoning day in determining the Bondholders entitled to receive interest, principal or any other amount due under the Bonds. No transfers of the Bonds may be made during this period intervening between and commencing on the Record Date and the relevant Interest Payment Date.

(b) Interest Accrual

Each Bond will cease to bear interest from and including the Maturity Date, as defined in the discussion on “Final Redemption”, below, unless, upon due presentation, payment of the principal in respect of the Bond then outstanding is not made, is improperly withheld or refused, in which case the Penalty Interest (see “Penalty Interest”), below, will apply.

(c) Determination of Rate of Interest

The interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed on the basis of a month of 30 days.

5. BONDHOLDERS’ PUT OPTION

(a) Put Option On the twentieth (20th) Interest Payment Date (the “Put Option Date”), each Bondholder shall have the option (but not the obligation) to require the Issuer to redeem the outstanding Bonds registered in such Bondholder’s name in whole or in part, in denominations of =P50,000 each, as a minimum and in integral multiples of =P10,000 thereafter (the “Put Option”) at a strike price computed as the aggregate of: (i) par or one hundred percent (100%) of face value of the outstanding principal amount of the Bonds being redeemed; and (ii) accrued interest computed up to the Put Option Date (collectively, the “Put Option Payment”) in respect of the Bonds covered by an exercised Put Option.

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(b) Exercise of the Put Option

During business hours on a date no earlier than sixty (60) days and no later than thirty (30) days prior to the Put Option Date (the “Put Exercise Period”), any Bondholder that elects to exercise the Put Option shall do so by delivery of an original and four copies of a notice of such exercise to the Trustee (the “Put Option Notice”) in the form set out in paragraph c., below, of this Condition 5. Upon receipt of a Put Option Notice fully complying with these Terms and Conditions, the Trustee shall transmit copies thereof to the Issuer, the Registrar and the Paying Agent. Payment of the Put Option Payment on the Put Option Date to Bondholders that had delivered complete and verified Put Option Notice during the Put Exercise Period shall be in the same manner as all payments to the relevant Bondholder under Condition 7 (Payments), below. Once executed, completed and delivered to the Trustee, a Put Option Notice is irrevocable. From such time until the redemption and payment by Ayala of the Put Option Payment, the Bonds may not be transferred in the books of the Registry by a Bondholder that has exercised a Put Option over such Bonds. (c) Information Required in the Put Option Notice

A Put Option shall be exercised by due execution and delivery of the form provided at the end of this section during the Put Exercise Period, submitted together with the required attachments.

6. REDEMPTION AND PURCHASE

(a) Final Redemption

Unless previously purchased and cancelled, the Bonds will be redeemed at par or one hundred percent (100%) of face value on April 30, 2017 (the “Maturity Date”). However, payment of all amounts due on such date may be made by Ayala through the Paying Agent, without adjustment, on the succeeding Business Day if the Maturity Date is not a Business Day.

(b) Redemption for Taxation Reasons

If payments under the Bonds become subject to additional or increased taxes other than the taxes and rates of such taxes prevailing on the Issue Date as a result of certain changes in law, rule or regulation, or in the interpretation thereof, and such additional or increased rate of such tax cannot be avoided by use of reasonable measures available to Ayala, Ayala may redeem the Bonds in whole, but not in part, on any Interest Payment Date (having given not more than 60 nor less than 30 days’ notice to the Trustee) at par plus accrued interest.

(c) Change in Law or Circumstance

The following events shall be considered as changes in law or circumstances (“Change of Law”) as it refers to the obligations of Ayala and to the rights and interests of the Bondholders under the Trust Indenture and the Bonds:

i. Any government and/or non-government consent, license, authorization, registration or approval now or hereafter necessary to enable Ayala to comply with its obligations under the Trust Indenture or the Bonds shall be modified in a manner which, in the reasonable opinion of the Trustee, while not constituting an Event of Default, will materially and adversely affect the ability of Ayala to comply with such obligations, or shall be withdrawn or withheld; and

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ii. Any provision of the Trust Indenture or any of the related documents is or becomes, for any reason, invalid, illegal or unenforceable to the extent that it becomes for any reason unlawful for Ayala to give effect to its rights or obligations hereunder, or to enforce any provisions of the Trust Indenture or any of the related documents in whole or in part, or any law is introduced to prevent or restrain the performance by the parties hereto of their obligations under the Trust Indenture or any other related documents.

In the event that Ayala should invoke any of the events described in this Condition 6(c), Ayala shall provide the Trustee an opinion of legal counsel confirming the occurrence of the relevant event and the consequences thereof as consistent herewith, such legal counsel being from an internationally recognized law firm reasonably acceptable to the Trustee. Thereupon the Trustee shall confirm that Ayala may redeem the Bonds in whole, but not in part, on any Interest Payment Date (having given not more than sixty (60) nor less than thirty (30) days’ notice to the Trustee) at par plus accrued interest. (d) Purchase and Cancellation Ayala may at any time purchase any of the Bonds at any price in the open market or by tender or by contract at any price, without any obligation to purchase Bonds pro-rata from all Bondholders and the Bondholders shall not be obliged to sell. Any Bonds so purchased shall be redeemed and cancelled and may not be re-issued.

7. PAYMENTS The principal of, interest on, and all other amounts payable on the Bonds will be payable to the Bondholders through checks issued by the Paying Agent and, at the option of the Bondholder, either: (a) made available for pick-up by such Bondholder or its duly authorized representative at the office of the Paying Agent at 16th Floor BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City; or (b) delivered via registered mail, at the Bondholder’s risk, to the addresses of the Bondholders appearing in the Register of Bondholders. Bondholders claiming checks from the Paying Agent will be required to present proof of identification documents and Bondholder representatives will be required to present written authority from the relevant Bondholder, in form and substance acceptable to the Paying Agent. The principal of, and interest on, the Bonds will be payable in Philippine Pesos. Ayala will ensure that so long as any of the Bonds remains outstanding, there shall at all times be a Paying Agent for the purposes of the Bonds and Ayala may terminate the appointment of the Paying Agent, subject as provided in the Registry and Paying Agency Agreement. In the event of the appointed office of any bank being unable or unwilling to continue to act as the Paying Agent, Ayala shall appoint the Makati City office of such other leading bank in the Philippines to act in its place. The Paying Agent may not resign its duties or be removed without a successor having been appointed. 8. PAYMENT OF ADDITIONAL AMOUNTS; TAXATION Interest income on the Bonds is subject to a final withholding tax at rates of between 20% and 35% depending on the tax status of the relevant Bondholder under relevant law, regulation or tax treaty. Except for such final withholding tax and as otherwise provided, all payments of principal and interest shall be made free and clear of any deductions or withholding for or on account of any present or future taxes or duties imposed by or on behalf of Republic of the Philippines, including but not limited to, issue, registration or any similar tax or other taxes and duties, including interest and penalties. If such taxes or duties are imposed, the same shall be for the account of Ayala. Provided, however, that Ayala shall not be liable for:

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(a) the applicable final withholding tax applicable on interest earned on the Bonds prescribed under the National Internal Revenue Code of 1997, as amended and its implementing rules and regulations as may be in effect from time to time, (the “Tax Code”). An investor who is exempt from the aforesaid withholding tax, or is subject to a preferential withholding tax rate shall be required to submit the following requirements to the Registrar, subject to acceptance by Ayala as being sufficient in form and substance: (i) certified true copy of the tax exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue confirming the exemption or preferential rate; (ii) a duly notarized undertaking, in the prescribed form, declaring and warranting its tax exempt status or preferential rate entitlement, undertaking to immediately notify Ayala of any suspension or revocation of the tax exemption certificates or preferential rate entitlement, and agreeing to indemnify and hold Ayala and the Registrar free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax; and (iii) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities which for purposes of claiming tax treaty withholding rate benefits, shall include evidence of the applicability of a tax treaty and consularized proof of the Bondholder’s legal domicile in the relevant treaty state, and confirmation acceptable to Ayala that the Bondholder is not doing business in the Philippines, provided further, that all sums payable by Ayala to tax exempt entities shall be paid in full without deductions for taxes, duties assessments or government charges subject to the submission by the Bondholder claiming the benefit of any exemption of reasonable evidence of such exemption to the Registrar;

(b) Gross Receipts Tax under Section 121 of the Tax Code;

(c) taxes on the overall income of any securities dealer or Bondholder, whether or not subject to

withholding; and

(d) Value Added Tax (“VAT”) under Sections 106 to 108 of the Tax Code, and as amended by Republic Act (R.A.) No. 9337.

Documentary stamp tax for the primary issue of the Bonds and the execution of the Bond Agreements, if any, shall be for Ayala’s account. 9. MAINTENANCE OF FINANCIAL RATIOS For as long as any of the Bonds remain outstanding, the Issuer hereby covenants that it shall: (a) Maintain a maximum Debt to Equity Ratio of 3.0 : 1.0

(b) Maintain a minimum Current Ratio of 0.5 : 1.0; 10. NEGATIVE PLEDGE For as long as any of the Bonds remains outstanding, Ayala covenants that Ayala shall not, without the prior written consent of the Bondholders holding more than fifty percent (50%) of the principal amount of the Bonds then outstanding (the “Majority Bondholders”), permit any indebtedness for borrowed money to be secured by or to benefit from Security in favor of any creditor or class of creditors without providing the Bondholders with the same kind or class of Security, the benefit of which is extended equally and ratably among them to secure the Bonds; provided however that, this restriction shall not prohibit: (a) Any Security over any asset to secure: (i) payment of the purchase price or cost of leasehold

rights of such asset; or (ii) the payment of the cost and expenses for the development of such asset pursuant to any development made or being made by Ayala in the ordinary course of business; or (iii) the payment of any indebtedness in respect of borrowed money (including

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extensions and renewals thereof and replacements thereof) incurred for the purpose of financing the purchase, lease or development of such asset;

(b) Any Security constituted for any obligation or credit facility incurred for the purpose of pursuing

any infrastructure project or investment therein, whether such infrastructure project is undertaken by Ayala itself, by its Affiliates, and/or by Ayala or its Affiliates with third parties, and whether the same is carried on separately from or integrated with any of Ayala’s real estate development, or any Security constituted by Ayala on its right to receive income or revenues (whether in the form of dividends or otherwise) from infrastructure projects or related investments therein;

(c) Any Security created for the purpose of paying current Taxes, assessments or other

governmental charges which are not delinquent or remain payable without any penalty; or the validity of which is contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof and adequate reserves having been provided for the payment thereof;

(d) Any Security to secure, in the normal course of the business of Ayala or its Affiliates: (i) statutory

or regulatory obligations; (ii) surety or appeal bonds; (iii) bonds for release of attachment, stay of execution or injunction; or (iv) performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases;

(e) Any Security: (i) imposed by law, such as carrier’s, warehousemen’s and mechanics’ liens and

other similar liens arising in the ordinary course of business and not material in amount; (ii) arising out of pledge or deposits under the workmen’s compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits or similar legislation; and (iii) arising out of set-off provisions in the normal course of its financing arrangements; provided that the Bondholders hereunder shall also have to the extent permitted by applicable Law, and upon notice to Ayala, a similar right of set- off;

(f) Any Security in favor of banks, insurance companies, other financial institutions and Philippine

Government agencies, departments, authorities, corporations or other juridical entities, which secure a preferential financing obtained by Ayala under a governmental program, and which cover assets of the Issuer which have an aggregate appraised value, determined in accordance with generally accepted appraisal principles and practices consistently applied not exceeding Eight Billion Philippine Pesos (=P8,000,000,000.00);

(g) Any Security existing on the date of the Trust Indenture which is disclosed in writing by Ayala to

the Trustee prior to the execution of the Trust Indenture; (h) Any Security established in favor of insurance companies and other financial institutions in

compliance with the applicable requirements of the Office of the Insurance Commission on admitted assets or the requirements of the Bangko Sentral ng Pilipinas on loans and financial accommodations extended to directors, officers, stockholders and related interest (DOSRI);

(i) Any Security to be constituted on the assets of Ayala after the date of the Trust Indenture which is

disclosed in writing by Ayala to the Trustee prior to the execution of the Trust Indenture or any Security for an aggregate loan accommodation not exceeding the equivalent of ten percent (10%) of the market value of the consolidated assets of Ayala as reflected in the latest appraisal report submitted by an independent and reputable appraiser;

(j) Any Security constituted over the investment of Ayala in any of its Affiliates, to guarantee or

secure the obligations of said Affiliates whether such investment is in the form of shares, deposits or advances, to guarantee or secure the obligations of said Affiliates;

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(k) Any Security constituted for the purpose of guaranteeing an Affiliate’s obligation in connection with any contract or agreement (other than for borrowed money);

(l) Any title transfer or retention of title arrangement entered into by Ayala in the normal course of its

trading activities on the counterparty’s standard or usual terms; or (m) Any Security created over (i) deposits made by Ayala with the proceeds of any loan facility made

to it by any bank or financial institution denominated in a currency (“foreign currency”) other than Philippine Pesos; or (ii) financial instruments denominated in a foreign currency owned by Ayala, in each case solely for the purpose of securing loan facilities denominated in Philippine Pesos granted to Ayala in an aggregate equivalent principal amount not exceeding the amount of the deposit or the face amount (or value) of that financial instrument; or

(n) Any Security created over cash deposits or marketable investment securities in favor of a bank or

financial institution to secure any borrowed money in connection with a treasury transaction, provided that the aggregate amount of security does not at any time exceed US$30,000,000 or its equivalent. For this purpose, a “treasury transaction” means any currency, commodity, or interest rate purchase, cap or collar agreement, forward rate agreement, future or option contract, swap or other similar agreement, in relation to Ayala’s treasury management.

11. EVENTS OF DEFAULT Ayala shall be considered in default under the Bonds and the Trust Indenture in case any of the following events (each an “Event of Default”) shall occur and is continuing: (a) Payment Default

Ayala fails to pay when due and payable any amount which Ayala is obliged to pay to the Bondholders under the Trust Indenture and the Bonds.

(b) Representation/Warranty Default

Any representation and warranty of Ayala hereof or any certificate or opinion submitted pursuant hereto proves to have been untrue, incorrect or misleading in any material respect as and when made and the circumstances which cause such representation or warranty to be incorrect or misleading continue for not less than fourteen (14) days (or such longer period as the Majority Bondholders shall approve) after receipt of written notice from the Bondholders to that effect.

(c) Other Default

Ayala fails to perform or violates any other provisions of the Trust Indenture and the Bonds, and such failure or violation is not remediable or, if remediable, continues to be unremedied after the applicable grace period, or in the absence of such grace period, after thirty (30) days from the date of occurrence of the said violation with respect to the covenant to maintain the prescribed financial ratios, (particularly a maximum debt to equity ratio of 3.0 : 1.0; and a minimum current ratio of 0.5 : 1.0); provided that the Events of Default constituting a payment default or closure default shall not be remediable.

(d) Cross Default

Ayala violates any term or condition of any contract executed by Ayala with any bank, financial institution or other person, corporation or entity for the payment of borrowed money which constitutes an event of default under said contract, or in general, violation of any, law or regulation which violation, if remediable, is not remedied by Ayala within ten (10) Business Days

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from receipt of notice by the Trustee to Ayala, or which violation is otherwise not contested by Ayala, and the effect of such violation results in the acceleration or declaration of the whole financial obligation to be due and payable prior to the stated normal date of maturity; and which violation will, further, in the reasonable opinion of the Trustee, adversely and materially affect the performance by Ayala of its obligations under the Trust Indenture and the Bonds. Provided, however, that no event of default will occur under this paragraph unless the aggregate amount of indebtedness in respect of which one or more of the events above mentioned has/have occurred equals or exceeds US$10 Million ($10,000,000.00) or its Peso equivalent.

(e) Expropriation Default

The Republic of the Philippines or any competent authority thereof takes any action to suspend the whole or the substantial portion of the operations of Ayala and to condemn, seize, nationalize or appropriate (either with or without compensation) Ayala or any material portion of its properties or assets, unless such act, deed or proceedings are contested in good faith by Ayala.

(f) Insolvency Default

There is an act of Bankruptcy vis-a-vis Ayala and the relevant proceedings, to the extent not initiated by Ayala, shall not have been reversed or stayed within a period of sixty (60) days or such longer period as Ayala satisfies the Bondholders is appropriate under the circumstances.

(g) Judgment Default

Any final judgment, decree or arbitral award for the sum of money, damages or for a fine or penalty in excess of Five Hundred Million Pesos (=P500,000,000.00) or its equivalent in any other currency is entered against Ayala and the enforcement of which is not stayed, and is not paid, discharged or duly bonded within thirty (30) calendar days after the date when payment of such judgment, decree or award is due under the applicable law or agreement.

(h) Writ and Similar Process Default

Any judgment, writ, warrant of attachment, injunction, stay order, execution or similar process shall be issued or levied against any material part of Ayala’s assets, business or operations and such judgment, writ, warrant or similar process shall not be released, vacated or fully bonded within thirty calendar (30) days after its issue or levy.

(i) Closure Default

Ayala voluntarily suspends or ceases operations of a substantial portion of its business for a continuous period of thirty (30) calendar days except in the case of strikes or lockouts or when necessary to prevent business losses or when due to fortuitous events or force majeure.

(j) Material Adverse Change

There occurs any event or circumstance which, in the reasonable opinion of the Majority Bondholders, would result in a material adverse change or have a material adverse effect on:

(i) the business, operations, financial condition or business prospects of Ayala taken as a whole; (ii) the ability of Ayala to perform any of its obligations under the Trust Indenture and the Bonds;

or (iii) the validity, legality or enforceability of the Trust Indenture or the Bonds.

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12. CONSEQUENCES OF DEFAULT (a) If any one or more of the Events of Default shall have occurred and be continuing, the Trustee

upon the written direction of the Majority Bondholders, by notice in writing delivered to Ayala, or if by the Majority Bondholders, by notice in writing delivered to Ayala and the Trustee, may declare the principal of the Bonds, all accrued interest, fees and other charges thereon, if any, to be immediately due and payable.

(b) This provision, however, is subject to the condition that, except in the case of a Writ and Similar

Process Default (as described in Condition 11(h) above), the Majority Bondholders, by written notice to Ayala and the Trustee may, during the prescribed curing period, if any, rescind and annul such declaration made by the Trustee pursuant to a consequence of default (see “Consequences of Default”), and the consequences of such declaration, upon such terms, conditions and agreement, if any, as they may determine; provided that, no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon.

(c) At any time after any Event of Default shall have occurred, the Trustee may:

i. by notice in writing to Ayala, the Paying Agent and the Registrar, require the Paying Agent and the Registrar to:

(aa) act thereafter as agents of the Bondholders represented by the Trustee on the terms

provided in the Registry and Paying Agency Agreement (with consequential amendments as necessary and save that the Trustee’s liability under any provisions thereof for the indemnification, remuneration and payment of out-of-pocket expenses of the Paying Agent and the Registrar shall be limited to amounts for the time being held by the Trustee on the trusts of the Trust Indenture in relation to the Bonds and available to the Trustee for such purpose) and thereafter to hold all sums, documents and records held by them in respect of the Bonds on behalf of the Trustee; and/or

(bb) deliver all evidence of the Bonds and all sums, documents and records held by them

in respect of the Bonds to the Trustee or as the Trustee shall direct in such notice; provided, that, such notice shall be deemed not to apply to any document or record which the Paying Agent or Registrar is not obliged to release by any law or regulation; and

ii. by notice in writing to Ayala require Ayala to make all subsequent payments in respect of the

Bonds to the order of the Trustee and-- with effect from the issue of any such notice until such notice is withdrawn-- proviso (aa) above and Ayala’s positive covenant to pay principal and interest on the Bonds, more particularly set forth in Section 4.1(a) of the Trust Indenture, shall cease to have effect.

In case any amount payable by Ayala under the Bonds, whether for principal, interest or otherwise, is not paid on due date, Ayala shall, without prejudice to its obligations to pay the said principal, interest and other amounts, pay Penalty Interest on the defaulted amount(s) from the time the amount falls due until it is fully paid.

(d) If any one or more of the events enumerated as a Change of Law in the discussion on “Change in

Law or Circumstance” above, shall occur and be continuing for a period of fifteen (15) Business Days with respect to the events contemplated in (i) or (ii) of Condition 6(c), above, the Majority Bondholders, by notice in writing delivered to Ayala through the Trustee, after the lapse of the said fifteen (15) Business Day period, may declare the principal of the Bonds, including all

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accrued interest and other charges thereon, if any, to be immediately due and payable, and upon such declaration the same shall be immediately due and payable without any pre-payment penalty under an optional redemption, anything in the Trust Indenture or in the Bonds contained to the contrary notwithstanding, subject to the notice requirements under the discussion on “Notice of Default”, below. Provided that such notice shall not be deemed either caused by a default under the discussion on “Events of Default”, above; or a notice of default under the discussion on “Notice of Default”, below.

13. NOTICE OF DEFAULT The Trustee shall, within five (5) days after the occurrence of any Event of Default, give to the Bondholders written notice of such default known to it, via publication in a newspaper of general circulation in Metro Manila for two (2) consecutive days as soon as practicable, indicating in the published notice that an Event of Default has occurred, unless the same shall have been cured before the giving of such notice. 14. PENALTY INTEREST Upon the occurrence and during the continuance of any Event of Default, Ayala shall pay interest on all amounts then due under and owing to the Bondholder under the Trust Indenture and the Bonds, including but not limited to the unpaid principal amount and any interest thereon, at a rate equal at all times to six percent (6%) per annum above, and in addition to, the Interest Rate, computed on the actual number of days from and including the date on which the said amount/s became due until full payment thereof on a year of 360 days. 15. PAYMENT IN THE EVENT OF DEFAULT Ayala covenants that upon the occurrence of any Event of Default, Ayala will pay to the Bondholders, through the Paying Agent, the whole amount which shall then have become due and payable on all such outstanding Bonds with interest at the rate borne by the Bonds on the overdue principal and with Penalty Interest as described above, and in addition thereto, Ayala will pay to the Trustee such further amounts as shall be determined by the Trustee to be sufficient to cover the cost and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any reasonable expenses or liabilities incurred without negligence or bad faith by the Trustee hereunder. Upon the occurrence of an Event of Default under as discussed in “Events of Default”, above, Bondholders shall have the right, but not the obligation, to require Ayala to redeem the Bonds in full, by payment of the amounts stated above, plus the principal amount, by delivery of the relevant evidence of the Bonds to the Trustee. 16. APPLICATION OF PAYMENTS Any money collected or delivered to the Paying Agent as a Consequence of Default, and any other funds held by it, subject to any other provision of the Trust Indenture and the Registry and Paying Agency Agreement relating to the disposition of such money and funds, shall be applied by the Paying Agent in the order of preference as follows: first, to the payment to the Trustee, the Paying Agent and the Registrar, of the costs, expenses, fees and other charges of collection, including reasonable compensation to them, their agents, attorneys and counsel, and all reasonable expenses and liabilities incurred or disbursements made by them, without negligence or bad faith; second, to the payment of the Penalty Interest; third, to the payment of the whole amount then due and unpaid upon the Bonds for interest; fourth , to the payment of the whole amount then due and unpaid upon the Bonds for principal; and fifth, the remainder, if any shall be paid to Ayala, its successors or assigns, or to whoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct.

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17. PRESCRIPTION Claims in respect of principal and interest or other sums payable hereunder will be prescribed unless made within ten (10) years (in the case of principal or other sums) or five (5) years (in the case of interest) from the date on which payment becomes due. 18. REMEDIES All remedies conferred by the Trust Indenture to the Trustee and the Bondholders shall be cumulative and not exclusive and shall not be so construed as to deprive the Trustee or the Bondholders of any legal remedy by judicial or extra judicial proceedings appropriate to enforce the conditions and covenants of the Trust Indenture, subject to the discussion below on “Ability to File Suit”. No delay or omission by the Trustee or the Bondholders to exercise any right or power arising from or on account of any default hereunder shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence thereto; and every power and remedy given by the Trust Indenture to the Trustee or the Bondholders may be exercised from time to time and as often as may be necessary or expedient. 19. ABILITY TO FILE SUIT No Bondholder shall have any right by virtue of or by availing of any provision of the Trust Indenture to institute any suit, action or proceeding for the collection of any sum due from Ayala hereunder on account of principal, interest and other charges, or for the appointment of a receiver or trustee, or for any other remedy hereunder unless (i) such Bondholder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof and the related request for the Trustee to convene a meeting of the Bondholders to take up matters related to their rights and interests under the Bonds; (ii) the Majority Bondholders shall have decided and made the written request upon the Trustee to institute such action, suit or proceeding in its own name; (iii) the Trustee for sixty (60) days after the receipt of such notice and request shall have neglected or refused to institute any such action, suit or proceeding and (iv) no directions inconsistent with such written request shall have been given under a waiver of default by the Bondholders, it being understood and intended, and being expressly covenanted by every Bondholder with every other Bondholder and the Trustee, that no one or more Bondholders shall have any right in any manner whatever by virtue of or by availing of any provision of the Trust Indenture to affect, disturb or prejudice the rights of the holders of any other such Bonds or to obtain or seek to obtain priority over or preference to any other such holder or to enforce any right under the Trust Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all the Bondholders. 20. WAIVER OF DEFAULT BY THE BONDHOLDERS The Majority Bondholders may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, or may on behalf of the Bondholders waive any past default except the events of default defined as a payment default, breach of representation or warranty default, expropriation default, insolvency default, or closure default, and its consequences. In case of any such waiver, Ayala, the Trustee and the Bondholders shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereto. Any such waiver by the Majority Bondholders shall be conclusive and binding upon all Bondholders and upon all future holders and owners thereof, irrespective of whether or not any notation of such waiver is made upon the certificate representing the Bonds.

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21. TRUSTEE, NOTICES (a) Notice to the Trustee All documents required to be submitted to the Trustee pursuant to the Trust Indenture and this Prospectus and all correspondence addressed to the Trustee shall be delivered to: To the Trustee: Metropolitan Bank and Trust Company– Trust Bankin g Group Attention: Adrelina V. Hife Subject: Ayala Corporation Fixed Rate Putable Bonds Due 2017 Address: 18th Floor, GT Tower International, Ayala Avenue corner H.V. Dela Costa Street,

Makati City Facsimile: 858-8010 All documents and correspondence not sent to the above-mentioned address shall be considered as not to have been sent at all.

(b) Notice to the Bondholders The Trustee shall send all notices to Bondholders to their mailing address as set forth in the Register of Bondholders. Except where a specific mode of notification is provided for herein, notices to Bondholders shall be sufficient when made in writing and transmitted in any one of the following modes: (i) registered mail; (ii) surface mail; (iii) by one-time publication in a newspaper of general circulation in the Philippines; or (iv) personal delivery to the address of record in the Register of Bondholders. The Trustee shall rely on the Register of Bondholders in determining the Bondholders entitled to notice. The publication in a newspaper of general circulation in the Philippines of a press release or a news item about a communication or disclosure made by the Issuer to the Securities and Exchange Commission on a matter relating to the Bonds shall be deemed a notice to the Bondholders of said matter on the date of the first publication. All other notices shall be deemed to have been received (i) ten (10) days from posting if transmitted by registered mail; (ii) fifteen (15) days from mailing, if transmitted by surface mail; (iii) on date of publication or (iv) on date of delivery, for personal delivery. (c) Binding and Conclusive Nature Except as provided in the Trust Indenture, all notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained by the Trustee for the purposes of the provisions of the Trust Indenture, shall (in the absence of willful default, bad faith or manifest error) be deemed received by and shall be binding on Ayala and all Bondholders, as relevant. No liability to the Issuer, the Paying Agent or the Bondholders shall attach to the Trustee in connection with the exercise or non-exercise by it of its powers, duties and discretions under the Trust Indenture resulting from the Trustee’s reliance on the foregoing. 22. DUTIES AND RESPONSIBILITIES OF THE TRUSTEE (a) The Trustee is appointed as trustee for and on behalf of the Bondholders and accordingly shall

perform such duties and shall have such responsibilities as provided in the Trust Indenture. The Trustee shall, in accordance with the terms and conditions of the Trust Indenture, monitor the compliance or non-compliance by Ayala with all its representations and warranties, and the observance by Ayala of all its covenants and performance of all its obligations, under and pursuant to the Trust Indenture. The Trustee shall observe due diligence required by applicable law and regulation in the performance of its duties and obligations under the Trust Indenture. For the

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avoidance of doubt, notwithstanding any actions that the Trustee may take, the Trustee shall remain to be the party responsible to the Bondholders, and to whom the Bondholders shall communicate with in respect to any matters that must be taken up with Ayala.

(b) The Trustee shall, prior to the occurrence of an Event of Default or after the curing of all such defaults which may have occurred, perform only such duties as are specifically set forth in the Trust Indenture. In case of default, the Trustee shall exercise such rights and powers vested in it by the Trust Indenture, and use such judgment and care under the circumstances then prevailing that individuals of prudence, discretion and intelligence, and familiar with such matters, exercise in the management of their own affairs.

(c) None of the provisions contained in these Terms and Conditions or the Prospectus shall require or be

interpreted to require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers.

23. RESIGNATION AND CHANGE OF TRUSTEE (a) The Trustee may at any time resign by giving ninety (90) days’ prior written notice to Ayala and to the

Bondholders of such resignation. (b) Upon receiving such notice of resignation of the Trustee, the Issuer shall immediately appoint a

successor trustee by written instrument in duplicate, executed by its authorized officers, one (1) copy of which instrument shall be delivered to the resigning Trustee and one (1) copy to the successor trustee. If no successor shall have been so appointed and have accepted appointment within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor, or any Bondholder who has been a bona fide holder for at least six months (the “bona fide Bondholder”) may, for and on behalf of the Bondholders, petition any such court for the appointment of a successor. Such court may thereupon after notice, if any, as it may deem proper, appoint a successor trustee.

(c) A successor trustee should possess all the qualifications required under pertinent laws, otherwise, the

incumbent trustee shall continue to act as such. (d) In case at any time the Trustee shall become incapable of acting, or has acquired conflicting interest,

or shall be adjudged as bankrupt or insolvent, or a receiver for the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its properties or affairs for the purpose of rehabilitation, conservation or liquidation, then Ayala may remove the Trustee concerned, and appoint a successor trustee, by written instrument in duplicate, executed by its authorized officers, one (1) copy of which instrument shall be delivered to the Trustee so removed and one (1) copy to the successor trustee. If Ayala fails to remove the Trustee concerned and appoint a successor trustee, any Bona Fide Bondholder may petition any court of competent jurisdiction for the removal of the Trustee concerned and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper, remove the Trustee and appoint a successor trustee. Such successor trustee should possess all the qualifications required under pertinent laws.

(e) The Majority Bondholders may at any time remove the Trustee for cause, and appoint a successor

trustee, by the delivery to the Trustee so removed, to the successor trustee and to Ayala of the required evidence of the action in that regard taken by the Majority Bondholders.

(f) Any resignation or removal of the Trustee and the appointment of a successor trustee pursuant to any

of the provisions the Trust Indenture shall become effective upon the earlier of: (i) acceptance of appointment by the successor trustee as provided in the Trust Indenture; or (ii) the effectivity of the resignation notice sent by the Trustee under the Trust Indenture (the “Resignation Effective Date”)

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provided, however, that after the Resignation Effective Date and, as relevant, until such successor trustee is qualified and appointed (the “Holdover Period”), the resigning Trustee shall discharge duties and responsibilities solely as a custodian of records for turnover to the successor Trustee promptly upon the appointment thereof by Ayala.

24. SUCCESSOR TRUSTEE (a) Any successor trustee appointed shall execute, acknowledge and deliver to Ayala and to its

predecessor Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor trustee, without further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and obligations of its predecessor in the trusteeship with like effect as if originally named as trustee in the Trust Indenture. The foregoing notwithstanding, on the written request of Ayala or of the successor trustee, the Trustee ceasing to act as such shall execute and deliver an instrument transferring to the successor trustee, all the rights, powers and duties of the Trustee so ceasing to act as such. Upon request of any such successor trustee, Ayala shall execute any and all instruments in writing as may be necessary to fully vest in and confer to such successor trustee all such rights, powers and duties.

(b) Upon acceptance of the appointment by a successor trustee, Ayala shall notify the Bondholders in

writing of the succession of such trustee to the trusteeship. If Ayala fails to notify the Bondholders within 10 days after the acceptance of appointment by the trustee, the latter shall cause the Bondholders to be notified at the expense of Ayala.

25. REPORTS TO BONDHOLDERS (a) The Trustee shall submit to the Bondholders on or before February 28 of each year from the relevant

Issue Date until full payment of the Bonds a brief report dated as of December 31 of the immediately preceding year with respect to:

(i) The property and funds, if any, physically in the possession of the Paying Agent held in trust

for the Bondholders on the date of such report; and

(ii) Any action taken by the Trustee in the performance of its duties under the Trust Indenture which it has not previously reported and which in its opinion materially affects the Bonds, except action in respect of a default, notice of which has been or is to be withheld by it.

(b) The Trustee shall submit to the Bondholders a brief report within 90 days from the making of any

advance for the reimbursement of which it claims or may claim a lien or charge which is prior to that of the Bondholders on the property or funds held or collected by the Paying Agent with respect to the character, amount and the circumstances surrounding the making of such advance; provided that, such advance remaining unpaid amounts to at least ten percent (10%) of the aggregate outstanding principal amount of the Bonds at such time.

(c) The following pertinent documents may be inspected during regular business hours on any Business

Day at the principal office of the Trustee:

(i) Trust Indenture (ii) Registry and Paying Agency Agreement (iii) Articles of Incorporation and By-Laws of the Company (iv) Registration Statement of the Company with respect to the Bonds

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26. MEETINGS OF THE BONDHOLDERS A meeting of the Bondholders may be called at any time and from time to time for the purpose of taking any actions authorized to be taken by or on behalf of the Bondholders of any specified aggregate principal amount of Bonds under any other provisions of the Trust Indenture or under the law and such other matters related to the rights and interests of the Bondholders under the Bonds. (a) Notice of Meetings

The Trustee may at any time call a meeting of the Bondholders, or the holders of at least twenty- five percent (25.0%) of the aggregate outstanding principal amount of Bonds may direct the Trustee to call a meeting of the Bondholders, to take up any allowed action, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Bondholders, setting forth the time and the place of such meeting and the purpose of such meeting in reasonable detail, shall be sent by the Trustee to the Issuer and to each of the registered Bondholders not earlier than fifteen (15) days nor later than forty five (45) days prior to the date fixed for the meeting. All reasonable costs and expenses incurred by the Trustee for the proper dissemination of the requested meeting shall be reimbursed by Ayala within ten (10) days from receipt of the duly supported billing statement.

(b) Failure of the Trustee to Call a Meeting

In case at any time Ayala, pursuant to a resolution of its board of directors or executive committee, or the holders of at least twenty-five percent (25.0%) of the aggregate outstanding principal amount of the Bonds, shall have requested the Trustee to call a meeting of the Bondholders by written request setting forth in reasonable detail the purpose of the meeting, and the Trustee shall not have mailed and published, in accordance with the notice requirements, the notice of such meeting within twenty (20) days after receipt of such request, then Ayala or the Bondholders in the percentage above specified may determine the time and place for such meeting and may call such meeting by mailing and publishing notice thereof.

(c) Quorum

The presence of the Majority Bondholders, personally or by proxy, shall be necessary to constitute a quorum to do business at any meeting of the Bondholders.

(d) Procedure for Meetings

(i) The Trustee shall preside at all the meetings of the Bondholders unless the meeting shall have been called by Ayala or by the Bondholders, in which case Ayala or the Bondholders calling the meeting, as the case may be, shall in like manner move for the election of the chairman and secretary of the meeting.

(ii) Any meeting of the Bondholders duly called may be adjourned from time to time for a period or

periods not to exceed in the aggregate of one (1) year from the date for which the meeting shall originally have been called and the meeting as so adjourned may be held without further notice. Any such adjournment may be ordered by persons representing a majority of the aggregate principal amount of the Bonds represented at the meeting and entitled to vote, whether or not a quorum shall be present at the meeting.

(e) Voting Rights

To be entitled to vote at any meeting of the Bondholders, a person shall be a registered holder of one or more Bonds or a person appointed by an instrument in writing as proxy by any such holder as of the date of the said meeting. The only persons who shall be entitled to be present or to speak at any

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meeting of the Bondholders shall be the persons entitled to vote at such meeting and any representatives of the Issuer and its legal counsel.

(f) Voting Requirement

All matters presented for resolution by the Bondholders in a meeting duly called for the purpose shall be decided or approved by the affirmative vote of the Majority Bondholders present or represented in a meeting at which there is a quorum except as otherwise provided in the Trust Indenture. Any resolution of the Bondholders which has been duly approved with the required number of votes of the Bondholders as herein provided shall be binding upon all the Bondholders and Ayala as if the votes were unanimous.

(g) Role of the Trustee in Meetings of the Bondholders

Notwithstanding any other provisions of the Trust Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of the Bondholders, in regard to proof of ownership of the Bonds, the appointment of proxies by registered holders of the Bonds, the election of the chairman and the secretary, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidences of the right to vote and such other matters concerning the conduct of the meeting as it shall deem fit.

27. AMENDMENTS

Ayala and the Trustee may amend or waive any provisions of the Bond Agreements if such amendment or waiver is of a formal, minor, or technical nature or to correct a manifest error or inconsistency, without prior notice to or the consent of the Bondholders or other parties, provided in all cases that such amendment or waiver does not adversely affect the interests of the Bondholders and provided further that all Bondholders are notified of such amendment or waiver. Ayala and the Trustee may amend the Terms and Conditions of the Bonds without notice to every Bondholder but with the written consent of the Majority Bondholders or a vote of the Majority Bondholders at a meeting called for the purpose (including consents obtained in connection with a tender offer or exchange offer for the Bonds) and with notice of any amendment to all Bondholders. However, without the consent of each Bondholder affected thereby, an amendment may not: (a) reduce the percentage of principal amount of Bonds outstanding that must consent to an

amendment or waiver; (b) reduce the rate of or extend the time for payment of interest on any Bond;

(c) reduce the principal of or extend the Maturity Date or vary the Put Option Date of any Bond;

(d) impair the right of any Bondholder to receive payment of principal of and interest on such Holder’s

Bonds on or after the due dates therefore or to institute suit for the enforcement of any payment on or with respect to such Bondholders;

(e) reduce the amount payable upon the redemption or repurchase of any Bond under the Terms and

Conditions or change the time at which any Bond may be redeemed;

(f) make any Bond payable in money other than that stated in the Bond;

(g) subordinate the Bonds to any other obligation of Ayala;

(h) release any security interest that may have been granted in favor of the Bondholders;

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(i) amend or modify the Payment of Additional Amounts, Taxation, the Events of Default of the

Terms and Conditions or the Waiver of Default by the Bondholders; or

(j) Make any change or waiver of this Condition. It shall not be necessary for the consent of the Bondholders under this Condition to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Condition becomes effective, Ayala shall send a notice briefly describing such amendment to the Bondholders in the manner provided in paragraph (b) entitled “Notices to the Bondholders” in Condition 21. 28. EVIDENCE SUPPORTING THE ACTION OF THE BONDHOLDE RS Wherever in the Trust Indenture it is provided that the holders of a specified percentage of the aggregate outstanding principal amount of the Bonds may take any action (including the making of any demand or requests, the giving of any notice or consent or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced by: (i) any instrument executed by the Bondholders in person or by the agent or proxy appointed in writing or (ii) the duly authenticated record of voting in favor thereof at the meeting of the Bondholders duly called and held in accordance herewith or (iii) a combination of such instrument and any such record of meeting of the Bondholders. 29. NOTICES TO THE BONDHOLDERS Notices to Bondholders shall be sent to their mailing address as set forth in the Register of Bondholders when required to be made through registered mail, surface mail or personal delivery. Except where a specific mode of notification is provided for herein, notices to Bondholders shall be sufficient when made in writing and transmitted in any one of the following modes: (i) registered mail; (ii) surface mail; (iii) by one-time publication in a newspaper of general circulation in the Philippines; (iv) personal delivery to the address of record in the Register of Bondholders or (v) disclosure through the Online Disclosure System of the Philippine Dealing and Exchange Corp. (PDEx) or the Philippine Stock Exchange (PSE). The Trustee shall rely on the Register of Bondholders in determining the Bondholders entitled to notice. All notices shall be deemed to have been received (i) ten (10) days from posting if transmitted by registered mail; (ii) fifteen (15) days from mailing, if transmitted by surface mail; (iii) on date of publication; (iv) on date of delivery, by personal delivery; or (v) on the date that the disclosure is uploaded on the website of the PDEx or the PSE. A notice to the Trustee is notice to the Bondholders. The publication in a newspaper of general circulation in the Philippines of a press release or news item about a communication or disclosure made by Ayala to the Securities and Exchange Commission or the PDEx or the PSE on a matter relating to the Bonds shall be deemed a notice to the Bondholders of said matter on the date of the first publication. 30. NON-RELIANCE Each Bondholder also represents and warrants to the Trustee that it has independently and, without reliance on the Trustee, made its own credit investigation and appraisal of the financial condition and affairs of Ayala on the basis of such documents and information as it has deemed appropriate and that he has subscribed to the Issue on the basis of such independent appraisal, and each Bondholder represents and warrants that it shall continue to make its own credit appraisal without reliance on the Trustee. The Bondholders agree to indemnify and hold the Trustee harmless from and against any and all liabilities, damages, penalties, judgments, suits, expenses and other costs of any kind or nature with respect to its obligations under the Trust Indenture, except for its gross negligence or wilful misconduct.

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GOVERNING LAW The Bond Agreements are governed by and are construed in accordance with Philippine law. CERTAIN DEFINED TERMS The following sets forth the respective definitions of certain terms used in this section “Description of the Bonds” as such terms are defined in the Trust Indenture. Except as otherwise provided and where context indicates otherwise, capitalized terms in this Description of the Bonds have the meanings ascribed to them in the Trust Indenture. (a) Affiliate means any corporation, directly or indirectly controlled by Ayala, whether by way of

ownership of at least twenty percent (20%) of the total issued and outstanding capital stock of such corporation, or the right to elect at least twenty percent (20%) of the number of directors in such corporation, or the right to control the operation and management of such corporation by reason of contract or authority granted by said corporation to Ayala.

(b) Bankruptcy means, with respect to a Person, (a) that such Person has (i) made an assignment for

the benefit of creditors; (ii) filed a voluntary petition in bankruptcy; (iii) been adjudged bankrupt, or insolvent; or had entered against such Person an order of relief in any bankruptcy or insolvency proceeding; (iv) filed a petition or an answer seeking for such Person any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation or filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Person in any proceeding of such nature; or (v) sought, consented to, or acquiesced in the appointment of a trustee, receiver or liquidator of such Person or of all or any substantial part of such Person’s properties; (b) 60 days have elapsed after the commencement of any proceeding against such Person seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation and such proceeding has not been dismissed; or (c) 60 days have elapsed since the appointment without such Person’s consent or acquiescence of a trustee, receiver or liquidator of such Person or of all or any substantial part of such Person’s properties and such appointment has not been vacated or stayed or the appointment is not vacated within 60 days after the expiration of such stay.

(c) Current Ratio means the ratio which Current Assets bear to Current Liabilities. (d) Debt to Equity Ratio means the ratio which Total Liabilities bears to Total Stockholders’ Equity (e) Majority Bondholders means the holders of more than fifty percent (50%) in principal amount, of the

Bonds then outstanding. (f) Security means any mortgage, pledge, lien or encumbrance constituted on any of Ayala’s properties,

for the purpose of securing its or its Affiliates’ obligation.

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FORM OF PUT OPTION NOTICE

[LETTERHEAD OF THE BONDHOLDER] [Date] Ayala Corporation Through: Metropolitan Bank and Trust Company – Trus t Banking Group

18th Floor, GT Tower International, Ayala Avenue corner H.V. Dela Costa Street Makati City, Metro Manila Philippines

Re: Put Option Notice in respect of the =P10 Billio n 7.20% Fixed Rate Putable Bonds issued by Ayala Corporation (“Ayala”) under a Trust Indenture dated April 16 2010 (the “Bonds”). Dear Sir/Madam: Reference is made to the Terms and Conditions of the Bonds. Unless otherwise defined herein, capitalized terms in this letter shall have the meaning ascribed to them in the Terms and Conditions. This is an irrevocable Put Option Notice by the undersigned Bondholder (the “Holder”). Being the holder of =P_________ in aggregate principal amount of the Bonds (being in denominations of =P50,000 each, as a minimum, and in integral multiples of =P10,000 thereafter) duly recorded and registered in my/our name with the Registrar, I/we hereby exercise my/our Put Option in the amount of Pesos: ____________ (=P________) in accordance with Condition 5 (Bondholders’ Put Option) of the Terms and Conditions and attach the required documents with and in support of this notice. I/We hereby authorize you, Ayala and the Registrar to verify the foregoing with the Registry and agree that the records of the Registry shall be conclusive insofar as this Put Option Notice is concerned. I/We acknowledge and understand that from and after the delivery of this Put Option Notice until the redemption and payment of the relevant Bonds by Ayala on the Put Option Date, I/We will not be able to amend or withdraw (although subsequent Put Option Notices may be submitted for Bonds not covered by a previously delivered Put Option Notice) this Put Option Notice and will not be able to transfer any Bonds covered thereby to any other Person. I/We represent and warrant that: (a) the Holder has good, complete and unencumbered title to the Bonds or is entitled to such title and

has not sold or otherwise dealt with those Bonds. (b) the Holder has obtained all consents which may be required by law or contract in respect of the

Holder or the Bonds to enable the Holder to deliver the relevant Bonds to Ayala for redemption as provided under the Terms and Conditions;

(b) the redemption of the relevant Bonds by Ayala will not result in the Holder contravening any law or agreement to which the Holder or the relevant Bonds is subject or (as relevant) any provisions of its constitutive documents;

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(c) at the date of this notice and at all times until the time of payment of the Put Option Payment by Ayala, the Holder will have good legal and beneficial title to the relevant Bonds free from any lien, encumbrance, third party interest or any other restriction on sale or transfer; and

(d) the undersigned is duly authorized to execute and deliver this Put Option Notice and it is legal, binding and may be fully relied upon by Ayala, the Trustee, the Registrar and the Paying Agent, who shall each be held free and harmless from any liability, loss or damage that may arise from their reliance on this Put Option Notice.

If the Put Option Notice is accomplished by a dealer/broker on behalf of a client, the undersigned broker hereby does declare that all the information given in connection with this Put Option Notice is true, legal and valid pursuant to the authority duly granted by the beneficial owner of the Bonds, and may be fully and unconditionally relied upon by Ayala, the Trustee, the Registrar and the Paying Agent. The dealer/broker thus agrees to hold PDTC free and harmless from any liability, loss or damage that may arise from the execution of this instruction. We recognize and agree that the transfer is subject to the PDTC Registry Rules that are in force and effect. This notice is irrevocable. Name and Signature of Holder/Dealer/Broker: Address: Contact Phone Number: Principal Amount of Bonds Subject to the Put Option Notice: Tax Identification Number: Registry Account Number: Registry Confirmation Number: Required Attachments

FOR INDIVIDUAL INVESTORS: Identification documents of the Bondholder; Two (2) duly accomplished signature cards containing the specimen signature of the Bondholder,

validated / signed by the Broker’s authorized signatory/ies, whose authority/ies and specimen signatures have been submitted to PDTC; and

Authorization Letter, if applicable, for the payment and delivery of the Put Option Payment. Such other documents as may be reasonably required by the Broker(s) / Registrar in implementation of

its internal policies regarding “knowing your customer” and anti-money laundering. FOR CORPORATE AND OTHER JURIDICAL ENTITY INVESTORS:

An original notarized Certificate of the Corporate Secretary of the Bondholder setting forth resolutions of the Bondholder’s Board of Directors authorizing the exercise of the Put Option and designating the signatories, with their specimen signatures, for the said purposes;

Copies of its Articles of Incorporation and By-laws and latest amendments thereof, together with the Certificate of Incorporation issued by the SEC or equivalent government institution, stamped and signed as certified as true copies by the SEC or by the Bondholder’s Corporate Secretary, or by an equivalent officer/s who is/are authorized signatory/ies;

Ownership structure of the Bondholder; A list of the natural persons who are the beneficial owners of the parent company of the Bondholder; Two (2) duly accomplished signature cards containing the specimen signatures of the Bondholder’s

authorized signatories, validated by its Corporate Secretary or by an equivalent officer/s who is/are authorized signatory/ies, and further validated/signed by the Broker’s authorized signatory/ies whose authority/ies and specimen signatures have been submitted to PDTC;

Identification document(s) of Bondholder’s authorized signatories; Identification document(s) of at least two (2) of the Bondholder’s Directors, including the managing

director, if any; identification documents of beneficial owners who own at least 10% of the capital stock of the Bondholder; identification document of the Corporate Secretary or of the signing equivalent officer/s; and

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Such other documents as may be reasonably required by the Broker(s) / Registrar in implementation of its internal policies regarding “knowing your customer” and anti-money laundering.

Authorization Letter, if applicable, for the payment and delivery of the Put Option Payment. Identification Documents Shall Consist Of: Any one (1) of the following valid identification documents bearing a recent photo, and which is not expired: Passport, Driver’s License, Professional Regulation Commission (PRC) ID, National Bureau of Investigation (NBI) Clearance, Police Clearance, Postal ID, Voter’s ID, Barangay Certification, Government Service Insurance System (GSIS) e-Card, Social Security System (SSS) Card, Senior Citizen Card, Overseas Workers Welfare Administration (OWWA) ID, OFW ID, Seaman’s Book, Alien Certification of Registration/Immigrant Certificate of Registration, Government Office and GOCC ID, e.g. Armed Forces of the Philippines (AFP ID), Home Development Mutual Fund (HDMF ID), Certification from the National Council for the Welfare of Disabled Persons (NCWDP), Department of Social Welfare and Development (DSWD) Certification, Integrated Bar of the Philippines ID, Company IDs issued by private entities or institutions registered with or supervised or regulated either by the BSP, SEC OR IC, or school ID duly signed by the principal or head of the school (for students who are beneficiaries of REMITTANCES/FUND TRANSFERS who are not yet of voting age)

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TTHHEE CCOOMMPPAANNYY OVERVIEW Ayala Corporation (“Ayala”, “AC” or the “Company”) was incorporated in the Philippines on January 23, 1968 as a limited liability corporation having a renewable term of 50 years. The Company is organized as a holding company holding equity interests in the Ayala Group (the “Group”), one of the most significant business groups in the Philippines. Ayala’s business activities are divided into: (a) real estate and hotels, (b) financial services, (c) telecommunications and (d) a portfolio of other investments held under an internal development division called AC Capital. AC Capital’s current holdings include investments in water distribution, electronics manufacturing services, automotive dealerships, business process outsourcing, international real estate investments, IT-related ventures, and various other non-core real-estate assets. Ayala’s operating companies are widely recognized as among the dominant companies in their respective industry sectors. Ayala became a public corporation in 1976 and its common shares are currently listed at the Philippine Stock Exchange (“PSE”). As of December 31, 2009, Ayala had a market capitalization of =P150.7 billion. The following table shows Ayala’s direct and effective ownership in its major subsidiaries and affiliates within business sectors as of December 31, 2009:

Direct ownership (%)

Effective ownership (%)

Real Estate and Hotels: Ayala Land, Inc. 53.3 53.3 Ayala Hotels, Inc. 50.0 76.7 Financial services Bank of the Philippine Islands 21.8 33.5 Telecommunications Globe Telecom, Inc. 30.5 30.5

AC Capital Ayala Automotive Holdings Corp. Ayala Aviation Corp. Azalea International Venture Partners Ltd. Azalea Technology Investments, Inc. Bestful Holdings Ltd. Integrated Microelectronics, Inc. Manila Water Company, Inc. Philwater Holdings Others AC International Finance Ltd. AYC Finance Ltd.

100.0 100.0

97.8 100.0 100.0

0.1 27.9 60.0

100.0 100.0

100.0 100.0 100.0 100.0 100.0

67.8 31.5 60.0

100.0 100.0

Strategy Ayala seeks to ensure that the Group maintains its commitment to its business activities in the Philippines and to explore possible international initiatives on a selective and opportunistic basis. Ayala intends to build on its leadership position in the Group's existing core businesses in real estate, financial services and telecommunications, and actively manage its portfolio of other investments and assets under AC Capital with a view toward maximum value creation and realization. Ayala expects its real estate, financial services and telecommunications businesses to remain its principal sources of dividend income, but contributions from its water distribution, electronics manufacturing and auto dealership operations are increasing. Ayala is presented from time to time with opportunities to invest in new business areas and

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will continue to consider such opportunities to the extent that such businesses would contribute to the overall strategic objectives of the Group. Geographical Segments Ayala generates foreign sales through its subsidiaries IMI, AG Holdings, Azalea Technology Investments, Inc. and LiveIt Solutions, Inc. For the full year of 2009, total foreign revenues amounted to =P16.0 billion out of the total revenues of =P76.3 billion, from =P16.0 billion in 2008. The table below lists the contribution of each geographical market to Ayala’s foreign sales.

Contribution to foreign sales Location 2009 2008 2007

Japan 6% 7% 59% USA 39% 42% 38% Europe 35% 28% 22% Others (Mostly Asia) 20% 23% 18%

MARKET FOR ISSUER’S COMMON EQUITY Ayala Dividend Policy Following are the dividends declared and paid by Ayala: Stock Dividends

PERCENT RECORD DATE PAYMENT DATE

20% May 22, 2007 June 18, 2007 20% April 24, 2008 May 21, 2008

Cash dividends – 2008

CLASS PAYMENT DATE RATE TERM / RECORD DATE On common shares July 21, 2008

February 3, 2009 2.00/share 2.00/share

July 2, 2008 January 9, 2009

Cash dividends – 2009

CLASS PAYMENT DATE RATE TERM / RECORD DATE On common shares July 10, 2009

February 2, 2010 2.00/share 2.00/share

June 23, 2009 January 8, 2010

Dividend Policy Dividends declared by the Company on its shares of stocks are payable in cash or in additional shares of stock. The Company does not have a minimum dividend policy: the payment of dividends in the future will depend upon the earnings, cash flow and financial condition of the Company and other factors. Stock Prices Ayala’s common shares are listed at the PSE. The closing prices of Ayala’s common shares for 2009, 2008 and 2007, adjusted for stock dividends, are as follows:

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2009 (in =P)

2008 (in =P)

2007* (in =P)

High Low High Low High Low 1st quarter 233.00 186.00 454.17 322.92 455.14 358.60 2nd quarter 312.50 202.00 352.50 257.50 479.97 386.18 3rd quarter 320.00 265.00 320.00 250.00 485.89 334.31 4th quarter 317.50 285.00 295.00 174.00 537.50 412.50

* adjusted to reflect the 20% stock dividend declared in January 2008 Source: Bloomberg The market capitalization of the Company’s common shares as of end-2009, based on the closing price of =P302.50/share, was approximately =P150.75 billion. The price of Ayala’s Common, Preferred “A” and Preferred “B” shares was =P292.50, =P520.00 and =P107.00, respectively as of March 31, 2010. Recent Sale of Unregistered Securities The Company has stock option plans for key officers (Executive Stock Option Plan - ESOP) and employees (Employee Stock Ownership Plan - ESOWN) covering 3.0% of the Company’s authorized capital stock. The grantees are selected based on certain criteria like outstanding performance over a defined period of time. The ESOP grantees may exercise in whole or in part the vested allocation in accordance with the vesting percentage and vesting schedule stated in the ESOP. Also, the grantee must be an employee of the Company or any of its subsidiaries during the 10-year option period. In case the grantee retires, he is given 3 years to exercise his vested and unvested options. In case the grantee resigns, he is given 90 days to exercise his vested options. The Company also has ESOWN granted to qualified officers and employees wherein grantees may subscribe in whole or in part to the shares awarded to them based on the 10% discounted market price as offer price set at grant date. To subscribe, the grantee must be an employee of the Group during the 10-year payment period. In case the grantee resigns, unsubscribed shares are cancelled, while the subscription may be paid up to the percent of holding period completed and payments may be converted into the equivalent number of shares. In case the grantee is separated, not for cause, but through retrenchment and redundancy, subscribed shares may be paid in full, unsubscribed shares may be subscribed, or payments may be converted into the equivalent number of shares. In case the grantee retires, the grantee may subscribe to the unsubscribed shares anytime within the 10-year period. The plan does not allow sale or assignment of the shares. All shares acquired through the plan are subject to the Company’s right to repurchase. The following shares were issued to/subscribed by the Company’s executives as a result of the exercise of stock options (ESOP) and the subscription to the stock ownership (ESOWN) plans:

No. of Shares

Year ESOP* ESOWN** 2007 131,072 619,912 2008 43,885 898,260 2009 6,365 1,813,994 2010 1,010 0 * Net of shares as payment (cashless exercise) ** Net of cancelled subscriptions

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The above shares formed part of the 8,864,000 ESOP and ESOWN shares subject of the Commission’s resolution dated January 12, 2006 confirming the issuance of such shares as exempt transactions pursuant to Section 10.2 of the Securities Regulation Code. Issuance and Exchange of Securities On March 15, 2010, the Board of Directors approved amendments to Article Seventh of the Articles of Incorporation of the Company providing for: (1) the reclassification of four million unissued common shares, par value =P50 per share, to a new series of preferred shares: 200,000,000 voting preferred shares, par value =P1 per share; and (2) the denial of pre-emptive rights to issues of common shares in exchange for properties needed for corporate purposes and to issues or re-issues of treasury or redeemed shares (the “Proposed Amendments”). The Board of Directors recommended the approval of the Proposed Amendments by the stockholders at their 2010 annual meeting. The voting preferred shares shall have the following features, rights and privileges: a) Issue value to be determined by the Board of Directors at the time of issuance of the shares; b) Dividend rate to be determined by the Board of Directors at the time of issuance of the shares and

declaration thereof to be determined by the Board; c) Cumulative in payment of current dividends as well as any unpaid back dividends; d) Non-convertible into common shares; e) Preference over holders of common stock in the distribution of corporate assets in the event of

dissolution and liquidation of the Corporation and in the payment of the dividend at the rate specified at the time of issuance;

f) Non-participating in any other or further dividends beyond that specifically payable on the shares; g) Voting; h) With pre-emptive rights only in respect of any issue of voting preferred shares as provided in the

Article Seventh of the Articles of Incorporation; and i) Redeemable at the option of the Corporation under such terms that the Board of Directors may

approve at the time of the issuance of shares. The creation of the voting preferred shares is proposed to allow more foreign ownership in common shares. This will give the Company greater flexibility in the use of its common shares to acquire assets wholly or partially owned by foreigners without impairing its ability to engage in nationalized activities. The denial of pre-emptive rights to issues of common shares in exchange for properties needed for corporate purposes will give the Company greater flexibility in the use of its common shares to acquire properties. The denial of pre-emptive rights to issues and re-issues of treasury or redeemed shares will give the Company greater flexibility in raising capital through the issuance or re-issuance of treasury or redeemed shares which are non-dilutive. DESCRIPTION OF PROPERTY Ayala owns four floors of the Tower One Building located in Ayala Triangle, Ayala Avenue, Makati City. These condominium units were purchased in 1995 and are used as Ayala's corporate headquarters. Other properties of Ayala include various provincial lots relating to its business operations totaling about 860 hectares and Metro Manila lots totaling 2.6 hectares. Out of the 860 hectares, only a 3-hectare portion has a mortgage lien but with a pending petition for cancellation. The Honda Cars Makati, Honda Cars Pasig, Honda Cars Alabang and Isuzu Alabang dealership buildings are located on its Metro Manila lots which are leased to these dealerships. These properties do not have any mortgage, lien or encumbrance. Other than as described above, Ayala, as a holding company does not hold significant properties apart from its investments in its subsidiaries. A discussion on the assets, prospects and challenge of each subsidiary of Ayala is set forth in the "Business" section of the Prospectus.

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MATERIAL CONTRACTS Ayala has not entered into any contract or agreement within the past two (2) years immediately preceding this filing, which contract or agreement is of material importance or outside the ordinary course of business, aside from the following: a) In 2007, Ayala issued, through a public offering registered with the SEC, 6.825% fixed rate bonds

with an aggregate size of =P6.0 billion. The bonds are unsecured. Under the terms of the bond, Ayala will redeem the bonds, at par on the final redemption date, which is in 2012 (five years and one day from issue date).

b) In 2008, Ayala issued, through a public offer =P6.0 billion of its Preferred A shares at an offer price of

=P500 per share. The shares were listed in the Philippine Stock Exchange. The Preferred A shares are cumulative, non-voting, and redeemable at the option of the Company and with a dividend rate of 8.88% per annum. The Preferred A shares may be redeemed at the option of the Company starting on the fifth anniversary of the listing date.

MATERIAL PATENTS, TRADEMARKS, AND INTELLECTUAL PROP ERTIES Ayala has no patent, trademark or intellectual property right to products which would be material to the operating companies. CHANGES IN CONTROL Ayala is not aware of the existence of any agreement that may result in a change in control of Ayala. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Intra-Group Transactions Ayala, its subsidiaries and certain of its affiliates have a substantial number of contractual arrangements with each other. Ayala’s subsidiaries and affiliates are independent entities and accordingly Ayala’s contractual arrangements with such corporations are entered into on an arm’s-length basis. The Group has, in the ordinary course of its business, entered into transactions with associates, joint ventures and other related parties principally consisting mainly of advances and reimbursement of expenses, various guarantees, construction contracts and management, marketing and administrative service agreements. Sales and purchases of goods and services to and from related parties are made at current market prices. In addition, Ayala obtains borrowings from banks and other financial institutions, including BPI, an affiliated commercial bank. Ayala’s borrowings are governed by existing BSP regulations, including in particular in respect of its borrowings from BPI, regulations on loans to Directors, Officers, Stockholders and other Related Interests. Other than Ayala’s borrowings from BPI, Ayala had no other transaction in which any of its Directors or Executive Officers was involved or had a direct or indirect material interest. There can be no assurance, however, that future arrangements between related parties will not involve conflicts of interest. Related Party Transactions There has not been any material transaction during the last two years, or proposed transaction, to which Ayala was or is to be a party, in which any of its Directors or Executive Officers, any nominee for election as a Director or any security holder identified in this Prospectus had or is to have a direct or indirect material interest.

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The Group, in its regular conduct of business, has entered into transactions with associates, jointly controlled entities and other related parties principally consisting of advances and reimbursement of expenses, purchase and sale of real estate properties, various guarantees, construction contracts, and development, management, underwriting, marketing and administrative service agreements. Sales and purchases of goods and services to and from related parties are made at normal market prices. The effects of the foregoing are shown under the appropriate accounts in the consolidated financial statements as follows (in thousands):

Receivable from related parties 2009 2008 Associates: (In Thousands) Interest in limited partnerships of AINA P=1,559,312 P=948,629 CHI 120,791 85,587 NTDCC 25,383 19 Naraya Development Co. Ltd. 17,863 16,628 Lagoon Development Corporation 15,337 25,626 Arch Capital 908 611 MD Express 144 19 Accendo Commercial Corp. – 63,510 1,739,738 1,140,629 Jointly controlled entities: MWCI 48,113 3,840 Globe 38,827 92,640 Alabang Commercial Corporation (ACC) 15,929 7,457 EGS Acquisition Corp. – 2,130,844 EGS Corp. – 2,855,215 102,869 5,089,996 Other related parties: Glory High 571,467 642,308 Columbus Holdings, Inc. (Columbus) 520,066 520,061 Key management personnel 280,488 220,877 Fort Bonifacio Development Corporation (FBDC) 87,296 247,428 Ayala Systems Technology, Inc. (ASTI) 76,747 – PPI Prime Ventures, Inc. 5,946 – Innove Communications, Inc. (Innove) 4,890 4,806 Honda Cars Philippines, Inc. (HCP) 603 – MyAyala 51 3,038 1,547,554 1,638,518 P=3,390,161 P=7,869,143

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Payable to related parties 2009 2008 Associates: (In Thousands) BLC P=78,829 P=– CHI 509 1,341 Arch Capital 427 – 79,765 1,341 Jointly controlled entities: Asiacom 94 – Globe 13 116 107 116 Other related parties: Columbus 484,888 – Cebu Property Ventures and Development Corporation 149,204 4,937 HCP 69,665 121,447 Green Horizons 13,455 6,371 Innove 110 1,196 Others 33,225 331 750,547 134,282 P=830,419 P=135,739

Income 2009 2008 2007 (In Thousands) Associates P=956,704 P=109,277 P=164,666 Jointly controlled entities 140,652 229,954 71,895 Other related parties 15,062 669,162 918,140 P=1,112,418 P=1,008,393 P=1,154,701 Cost and expenses 2009 2008 2007 (In Thousands) Jointly controlled entities P=47,732 P=54,339 P=46,201 Other related parties 7,294 12,983 1,938 P=55,026 P=67,322 P=48,139

Receivable from related parties include the following: a. Receivables from AINA’s interest in limited partnerships are nontrade in nature and bear interests

ranging from 12% to 15%. b. In 2008, AYC Holdings, Inc. issued promissory notes and advances to EGS Corp. and EGS

Acquisition Corp. amounting to P=4,986.1 million. The advances amounting to P=665.3 million is payable in one year and bear interest at the rate of 12% per annum. The promissory notes amounting to P=4,320.8 million is payable over a period of five years and bear interest at the rate of 12% to 18% per annum. The notes and advances were partially collected in October 1, 2009. The balance amounting to P=1,655.8 million owed by EGS Corp. was assigned to NewBridge in 2009.

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c. Promissory notes issued by BLC, which were assigned by MPC to ALI and Evergreen Holdings Inc.

(EHI) and the advances subsequently made by ALI to FBDC to fund the completion of the Bonifacio Ridge project and to BLC to finance the costs to be incurred in relation to its restructuring program are due and demandable and bear interest at the rates of 12% to 14% per annum.

d. Any other outstanding balances at the year-end are unsecured, interest free and will be settled in

cash.

Allowance for doubtful accounts on amounts due from related parties amounted to P=5.2 million and P=8.0 million as of December 31, 2009 and 2008, respectively. Reversal of provision for doubtful accounts in 2009 amounted to P=2.8 million and provision for doubtful accounts amounted to P=6.0 million in 2008, P=1.7 million in 2007.

Compensation of key management personnel by benefit type follows:

2009 2008 2007 (In Thousands) Short-term employee benefits P=864,014 P=675,164 P=503,101 Share-based payments 167,886 184,521 144,767 Post-employment benefits 103,979 48,256 78,110 P=1,135,879 P=907,941 P=725,978

COSTS OF ENVIRONMENTAL COMPLIANCE As Ayala Corporation is a holding company, costs related to environmental compliance have been minimal and have not been material. GENERAL CORPORATE INFORMATION Corporate Governance Ayala has always been committed to best practices of corporate governance. It has endured for 175 years due in large part to the integrity it has earned, the performance it has achieved and the governance standards it has upheld these many years. The Company’s corporate governance principles were formalized in its Manual of Corporate Governance (the “Manual”), which the Company adopted on September 2, 2002 and has since complied with. The Manual establishes corporate governance practices that are founded on rigorous systems and processes designed to ensure the Company’s progress and stability, that an effective system of check and balance is in place and that a high standard of accountability and transparency to all stakeholders is enforced. The Manual conforms to the SEC’s requirements for manuals of corporate governance. It defines primarily the roles and responsibilities of the Board, Management and the Executive Officers. More importantly, it includes a statement of their respective liabilities in the event of non-compliance or violations of any of the provisions of the Manual. It also establishes, among others, policies on (a) independent directors, (b) Board committees, (c) conflicts of interest, (d) internal and external audit procedures and practices, (e) stockholders’ rights and interests and (f) management’s responsibility to communicate and inform stakeholders matters related to the Company’s affairs. The principles embodied in the Manual lay the foundation for the appropriate supervision and good management of the Company to safeguard shareholders’ interests and sustain the Company’s long-term growth. • The evaluation system which was established to measure or determine the level of compliance of the

Board of Directors and top level management with its Manual of Corporate Governance consists of a

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Board Performance Assessment which is accomplished by the Board of Directors indicating the compliance ratings. The above is submitted to the Compliance Officer who issues the required certificate of compliance with the Company’s Corporate Governance Manual to the Securities and Exchange Commission.

• To ensure good governance, the Board establishes the vision, strategic objectives, key policies, and procedures for the management of the company, as well as the mechanism for monitoring and evaluating Management’s performance. The Board also ensures the presence and adequacy of internal control mechanisms for good governance.

• The Company is taking further steps to enhance adherence to principles and practices of good corporate governance

The Board regularly meets at least on a quarterly basis. It ensures the presence and adequacy of internal control mechanisms for good governance in accordance with the Manual. The minimum internal control mechanisms for the Board’s oversight responsibility include, but are not limited to: • Ensuring the presence of organizational and procedural controls, supported by an effective

management information system and risk management reporting system; • Reviewing conflict-of-interest situations and providing appropriate remedial measures for the same; • Appointing a Chief Executive Officer (“CEO”) with the appropriate ability, integrity and experience to

fill the role, as well as defining the CEO’s duties and responsibilities; • Reviewing proposed senior management appointments; • Ensuring the selection, appointment and retention of qualified and competent management; reviewing

the Company’s personnel and human resources policies, compensation plan and the management succession plan;

• Institutionalizing the internal audit function; and • Ensuring the presence of, and regularly reviewing, the performance and quality of external audit. There were no deviations from the Company’s Manual of Corporate Governance. The Company has adopted in the Manual of Corporate Governance the leading practices and principles of good corporate governance and full compliance therewith has been made since the adoption of the Manual. Shareholder and Investor Relations The Company believes that open and transparent communications are requisite for sustained growth and building investor confidence. Our investor communications program seeks to promote greater understanding of the company’s long-term value creation proposition. The Company, through its Investor Relations Unit reporting directly to the Head of Corporate Strategy, addresses the various information requirements of the investing public and communicates with minority shareholders through timely and full disclosures to the Philippine Stock Exchange, regular quarterly briefings, Annual General Meetings, one-on-one meetings, conference calls, road shows and investor conferences, and web site, e-mails, and telephone calls. The Company holds regular briefings and meetings with buy-side and sell-side analysts and financial analysts from the banking community. Access to senior management is also provided to analysts and fund managers. In addition to the year-round meetings with the Head of Corporate Strategy and Chief Finance Officer, analysts are given an opportunity to meet the Management Committee members, the President, and Chairman and CEO upon request. The Company maintains a web site which includes a section on Investor Relations that details the company’s organization structure, financial and operating performance, ownership, and governance practices. This is updated on a regular basis when and as disclosures to regulatory agencies are made. Presentations made during analysts briefings and investor conferences are likewise made available on the web site for public access.

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BBUUSSIINNEESSSS

I. Real Estate and Hotels

Ayala conducts its real estate and hotels business through its subsidiaries Ayala Land, Inc. (“ALI”) and Ayala Hotels. Inc. (“AHI”). As of December 31, 2009, Ayala effectively owned 53.3% of ALI common shares and 76.6% of AHI. AYALA LAND, INC. ALI, one of the largest and most diversified real estate conglomerates in the Philippines, is principally engaged in the planning, development and marketing of large-scale communities having a mix of residential, commercial and other uses. Its principal businesses include planning and development of mixed-use properties, particularly, the subdivision and sale of residential and commercial lots in planned communities and the development and leasing of retail space and land in these communities. ALI also builds and sells residential condominium and office buildings, develops industrial and business parks and develops and sells middle income and affordable housing units. ALI also owns hotels and movie theaters, and provides property management and construction services to government infrastructure and other projects. As of December 31, 2009, ALI’s land bank comprised a total of 3,929 hectares of fully converted properties in various locations nationwide. ALI was spun-off by Ayala in 1988 to enhance management focus on its existing real estate business and to highlight the value of the assets, management and capital structure of the real estate business. ALI has a market capitalization of =P146 billion as of December 31, 2009 based on its shares’ closing price as of that date. In 1991, ALI shares were offered to the public in a =P2.5 billion initial public offering (“IPO”) of primary and secondary shares, and subsequently listed on the Makati and Manila Stock Exchanges (the predecessors of the PSE). The IPO diluted Ayala’s effective interest in ALI to 88.2%. Since then, there were further dilutions and sales of shares and so as of December 31, 2009, Ayala’s effective interest in ALI stood at 53.3%. ALI’s subsidiaries and affiliates as of December 31, 2009 were as follows:

Ownership (%) Date of

Incorporation By Ayala

Land By Subsidiary

/ Affiliate CORE BUSINESS Strategic Landbank Management Aurora Properties, Inc. December 3, 1992 70.0 Vesta Property Holdings, Inc. October 22,1993 70.0 Ceci Realty, Inc. August 22, 1974 60.0 Emerging City Holdings, Inc. July 19, 2002 50.0 Columbus Holdings, Inc. July 19, 2002 70.0 Bonifacio Land Corporation(a) October 20, 1994 5.3 70.1 Fort Bonifacio Development Corp.(b) February 7, 1995 55.0 Berkshires Holdings, Inc. December 4, 2002 50.0 Columbus Holdings, Inc. July 19, 2002 30.0 Bonifacio Land Corporation(a) October 20, 1994 5.3 70.1

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Ownership (%) Date of

Incorporation By Ayala

Land By Subsidiary

/ Affiliate Fort Bonifacio Development Corp.(b) February 7, 1995 55.0 Regent Time International Limited March 28, 2003 100.0 Bonifacio Land Corporation (a) October 20, 1994 5.3 4.8 Fort Bonifacio Development Corp(b) February 7, 1995 55.0 Buendia Landholdings, Inc. October 27, 1995 100.0 Red Creek Properties, Inc. October 17, 1994 100.0 Crimson Field Enterprises, Inc. October 26, 1995 100.0 Crans Montana Property Holdings Corp December 28, 2004 100.0 Amorsedia Development Corporation March 6, 1996 100.0 HLC Development Corporation June 28, 1996 100.0 Ecoholdings Company, Inc. September 25, 2008 100.00 Residential Development Avida Land Corp. October 30, 1990 100.0 Buklod Bahayan Realty and Development Corp. November 5, 1996 100.0 First Communities Realty, Inc. May 29, 2000 100.0 Avida Sales Corp. December 22, 2008 100.0 Amicassa Process Solutions, Inc. June 2, 2008 100.0 Alveo Land Corp. (formerly Community Innovations, Inc.

September 29, 1995 100.0

Serendra, Inc. June 7, 1994 67.0 Roxas Land Corporation March 16, 1996 50.0 Amorsedia Development Corporation March 6, 1996 100.0 OLC Development Corporation June 28, 1996 100.0 Ayala Greenfield Development Corp. July 17, 1997 50.0 Ayala Land Sales, Inc. March 6, 2002 100.0 Ayala Land International Sales, Inc. March 29, 2005 100.0 Shopping Centers Northbeacon Commercial Corporation August 13, 1970 100.0 Station Square East Commercial Corporation March 17, 1989 69.0 Accendo Commercial Corp. December 17, 2007 56.7 ALI-CII Development Corporation August 6, 1997 50.0 Alabang Commercial Corporation June 28, 1978 50.0 South Innovative Theatre Management, Inc. February 2, 2001 100.0 North Triangle Depot Commercial Corporation March 20, 2001 49.3 Lagoon Development Corporation August 30, 1996 30.0 Primavera Town Centre, Inc. December 18, 2009 100.0 Ayala Theatres Management, Inc. August 10, 1984 100.0 Five Star Cinema, Inc. December 18, 2000 100.0 Food Court Company, Inc. November 14, 1997 100.0 Leisure and Allied Industries Phils., Inc. October 10, 1997 50.0 Corporate Business Laguna Technopark, Inc. November 15, 1990 75.0 Asian I-Office Properties, Inc September 24, 2007 60.0 ALI Property Partners Holdings Corp.(c) July 25, 2006 80.0 ALI Property Partners Corp.(c) July 26, 2006 20.0 60.0 One Dela Rosa Property Development Inc. September 4, 2006 100.0

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Ownership (%) Date of

Incorporation By Ayala

Land By Subsidiary

/ Affiliate First Gateway Real Estate Corp. September 4, 2006 100.0 UP North Property Holdings, Inc March 26, 2007 100.0 Glensworth Development, Inc. August 23, 2007 100.0 Gisborne Property Holdings, Inc. August 24, 2007 100.0 Sunnyfield E-Office Corporation July 7, 2008 100.0 Asterion Technopod, Inc. July 8, 2008 100.0 Crestview E-Office Corporation July 8, 2008 100.0 Summerhill E-Office Corporation July 7, 2008 100.0 Hillsford Property Corp. August 24, 2007 100.0 Construction Makati Development Corporation August 15, 1974 100.0 Visayas Mindanao Cebu Holdings, Inc. December 9, 1988 47.3 Cebu Property Ventures & Development Corp. August 2, 1990 7.8 76.3 Asian I-Office Properties, Inc. September 24, 2007 40.0 Cebu Leisure Company, Inc. January 31, 1994 100.0 CBP Theatre Management Inc. February 1, 1994 100.0 Cebu Insular Hotel Company, Inc. April 6, 1995 37.1 International First Longfield Investments Limited October 23, 2006 100.0 Green Horizons Holdings Limited October 25, 2006 100.0 ARCH Capital Management Co. Ltd. May 6, 2006 17.0 ARCH Capital Partners L.P. April 19, 2007 8.0 SUPPORT BUSINESS Property Management Ayala Property Management Corporation August 8, 1977 100.0 Hotels Ayala Hotels, Inc. April 11, 1991 50.0 Enjay Hotels, Inc. July 12, 1990 100.0 Cebu Insular Hotel Company, Inc. April 6, 1995 62.9 Greenhaven Property Venture, Inc. July 9, 2008 100.0 OTHERS KHI-ALI Manila, Inc. January 30, 2007 60.0 KHI Manila Property, Inc. August 13, 2007 20.0 Astoria Investment Ventures, Inc.(d) February 29, 1996 100.0 ALInet.com, Inc. May 5, 2000 100.0 CMPI Holdings, Inc. May 30, 1997 60.0 CMPI Land, Inc. March 27, 1998 60.0

(a) ALI’s effective ownership in Bonifacio Land Corporation is 45.05% (b) ALI’s effective ownership in Fort Bonifacio Development Corporation is 24.78% (c) ALI’s effective ownership in APPHC is 80% and in APPCO is 68%

(d) Pertains to common shares

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ALI has long enjoyed leadership in the traditional markets it serves, leveraging on long term relationships with customers, landowners, tenants, its employees, the local government and NGO communities, and providers of capital. ALI shares values and a common long-term orientation that allows all parties concerned to prosper over time. Many of the best names in local and international retailing anchor its shopping centers while top multinationals either set up base in its headquarter-type offices or locate in its business process outsourcing (BPO) facilities. ALI is also the partner of choice for strategic new partners, such as the Shangri-La and Kingdom Hotels groups, which want to make significant new investments in the country and help prime ALI’s strategic growth centers. ALI plans to maintain and enhance its position as the leading property developer in the Philippines by continuing to develop large-scale, mixed-use integrated communities while diversifying its revenue base across its wide portfolio of businesses. To achieve this, ALI will embark on an aggressive strategy anchored on four main pillars that will lay the ground work for the Company’s long-term sustainable growth:

• Growth. ALI will actively strengthen and slowly establish its presence in several identified growth centers across the country to effectively expand its footprint into new geographies. It will also introduce new formats within its existing business models to diversify its portfolio of highly differentiated product offerings and tap into previously unserved markets and consumer segments to broaden its reach.

• Margin Improvement. ALI will continue to implement various spend management and cost control measures and pursue operational efficiencies further across the organization, without sacrificing quality and with strict adherence to the principles of sustainability, to bring overall costs down and drive profitability.

• Capital Efficiency. The ALI will also make more efficient use of resources and capital to improve asset turnover and returns on capital. To this end, ALI will pursue an asset-light approach to development and optimize land use by maximizing synergies within the organization, moving with scale to maximize utilization and value-capture.

• Organizational Development. ALI will continue to strengthen its risk management program to effectively contain strategic, operational, financial and supply-chain risks associated with the much increased business activity levels and enhance its internal talent pool and support systems ensure that these are supportive of ALI’s growth objectives.

Business Lines ALI’s projects are segregated into various business lines, based on their operations. These business lines, categorized into core businesses and support businesses, are described below. Core Businesses

1. Residential Developments

Sale of high-end and upper middle-income residential lots and units, affordable housing units and lots, and leisure community developments; lease of residential developments under joint venture;

2. Shopping Centers

Development of shopping centers and lease to third parties of retail space and land therein; operation of movie theaters, food courts, entertainment facilities and carparks in these commercial centers; management and operations of malls which are co-owned with partners;

3. Corporate Business

Development and lease or sale of office buildings; sale of industrial lots and lease of factory buildings;

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4. Strategic Landbank Management

Acquisition, development and sale of large-scale, mixed-use, master-planned communities; sale of override units or ALI’s share in properties made available to subsidiaries for development; lease of gas station sites and carparks outside Ayala Center.

5. Construction

Land development and construction of ALI and third party projects;

6. Geographic Businesses:

Visayas-Mindanao

Development, sale and lease of ALI’s and subsidiaries' product offerings in key cities in the Visayas and Mindanao regions. This consists of shopping centers and residential developments; International Investment in an Asian real estate private equity fund and a fund management company.

Support Businesses

1. Hotels

Development and management of hotels/serviced apartments; lease of land to hotel tenants;

2. Property Management

Facilities management of ALI and third-party projects;

In addition to the above business lines, ALI also derives other income from its investment activities and sale of non-core assets. COMPETITION ALI is subject to significant competition in each of its principal businesses. Competitive pressure is expected to remain as large property developers focus on the value-conscious middle market. Sustained demand growth is not likely to occur without real improvement in employment and real incomes. However, ALI believes that, at present, there is no single property company that has a significant presence in all sectors of the property market. ALI competes with other developers and developments to attract purchasers of land and residential units, office and retail tenants as well as other construction and property management firms, and hotel operators. Land and Residential Sales With respect to land and condominium sales, ALI competes for purchasers primarily on the basis of reputation, reliability, price and the quality and location of the community in which the relevant site is located. With respect to its horizontal residential housing developments, ALI competes for buyers based on quality of projects and reasonable pricing of units.

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(a) High-end residential ALI continues to be the leader in the high-end residential market. It competes with a price premium over other high-end developers but justifies it with superior locations, workmanship quality, timely project completions, and overall reputation in the real estate industry. Through these, it has been able to keep well ahead of other high-end players. Real estate has always been a major investment vehicle for the affluent. However, in a volatile environment, such as the recent financial crisis and the subsequent global economic downturn, the high-end market tends to “wait and see,” or they simply choose to place their money in other investment instruments. With confidence returning as market risks abated in 2Q09, sales of high-end lots like Westgrove Heights, Abrio and Montecito in NUVALI have recovered from 1Q09 and stabilized since 2Q09 with the absence of new residential projects launched in the second half of the year. ALI has mitigated the market risks it faces through carefully planned project launches, clear product differentiation, product innovation, and increased market expansion through overseas sales and new segments. (b) Middle-income residential In the middle-income market segment, the environment remains challenging due to the number and aggressive moves of competitors. ALI’s middle-income residential business (through its subsidiary, Alveo Land Corp.) was affected as booked units declined in 2008 from 2007. However, Alveo’s performance began to improve in 1Q09 which was generally sustained for the remainder of 2009. Demand is expected to remain strong this year for several reasons: (a) more upbeat economic outlook, (b) strong buying interest from the domestic market and overseas based Filipinos, and (c) emerging preference for condominium living. ALI remains confident that it can compete effectively in this segment because of its superior product offering in terms of location, amenities, features, after-sales service, and very competitive pricing and payment terms. (c) Affordable residential ALI offers affordable residential projects through its wholly-owned subsidiary, Avida Land Corporation. In this segment, there is an increase in activities and marketing efforts of major developers to reach their desired target market. Positive factors, on the other hand are spurring interest because of their long-term effects in the real estate industry:

• Increased developments north of Manila due to the North Luzon Expressway and the opening of the Subic-Clark-Tarlac toll expressway;

• Rehabilitation of the South Luzon Expressway to spur growth in the Cavite, Laguna, Batangas area south of Metro Manila;

• Increasing purchases by the overseas-based Filipino market due to marketing and promotions by various developers; and

• Availability of financing from the Home Development Mutual Fund (Pag-IBIG). Office Space and Retail Rental With respect to its office rental properties, ALI competes for tenants primarily based upon the quality and location of the relevant building, the reputation of the building owner, the quality of support services provided by the property manager, and rental and other charges. Under the current environment, lease

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rates and occupancy levels however are under pressure in the Makati Central Business District where ALI office buildings are located. According to research data provided by Colliers International Philippines, vacancy rate for all grades as of end-December 2009 is estimated at 7.3%, up from end-September 2009’s 6.9% level, while average lease rates have gone off by an average of 4% for all office grades during the same comparative periods. With respect to its retail properties for lease, ALI competes for tenants primarily based upon the ability of the relevant retail center to attract customers, which generally depends on the quality and location of, and mix of tenants in, the relevant retail center and the reputation of the owner and/or operator of the retail center, as well as rental and other charges. The market for shopping centers has become especially competitive and the number of competing properties is expected to grow. Some competing shopping centers are located within relatively close proximity of each of ALI’s commercial centers. ALI, nonetheless, has maintained healthy occupancy levels and registered favorable lease rates. Industrial Property Business The industrial property business is affected by oversupply as well as limited industrial expansion and declining foreign investments. Overall, the industrial property segment is not likely to show significant demand improvement in the medium term. ALI, through Laguna Technopark, Inc. (LTI), remains the preferred location for locators and has been successfully expanding its offerings at a time when industrial parks in the Calabarzon area have been experiencing the effects of an oversupply of manufacturing and processing facilities. Despite the slowdown in export market last year, LTI was able to sell a considerable number of lots when other players in the industry were having difficulties moving their inventory. Hotel Operations Although the hotel industry has seen increasing visitor arrivals in the past several years, it is generally subject to the slowdown in business activity due to global financial and local political turmoil and security concerns. Nonetheless, according to the Department of Tourism, the 3.95 million foreign tourists who visited the Philippines from January-August 2009 was a shade higher than the 3.94 million tourists recorded in the same period last year. Infrastructure, Construction and Property Developme nt ALI’s construction business is exposed to any potential sector-wide slowdown in construction activities. Notwithstanding stiff competition in the industry, ALI intends to maintain and enhance its position as the leading property developer in the Philippines by continuing its over-all business strategy of developing large-scale, mixed-use integrated communities within growth centers that perpetuate its strong market presence while ensuring a steady revenue growth for the Company. Furthermore, the Company has started to venture into stand-alone opportunities like the TriNoma, The Columns and BPO buildings in various locations within and outside Makati and Bonifacio Global City business districts. ALI further intends to diversify its revenue base by expanding its real estate business into different markets, specifically the economic housing segment, and geographic areas and growth centers across the country where there are significant growth opportunities or where its proposed developments complement its existing real estate business.

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DIVIDEND POLICY Dividends declared by ALI on its shares of stock are payable in cash or in additional shares of stock. The payment of dividends in the future will depend upon the earnings, cash flow and financial condition of ALI and other factors.

Special cash dividends are declared depending on the availability of cash, taking into account ALI’s project and capital expenditures and the progress of its ongoing asset rationalization program.

Cash dividends are subject to approval by ALI’s Board of Directors but no stockholder approval is required. Property dividends which may come in the form of additional shares of stock are subject to approval by both ALI’s Board of Directors and ALI’s stockholders. In addition, the payment of stock dividends is likewise subject to the approval of the SEC and PSE.

Other than the restrictions imposed by the Corporation Code of the Philippines, there is no other restriction that limits ALI’s ability to pay dividends on common equity.

DESCRIPTION OF PROPERTY

The following table provides summary information on ALI’s landbank as of December 31, 2009. Properties are wholly owned and free of liens unless noted.

Location Hectares Primary land use

Makati 1 50 Commercial/ Residential Taguig 2 43 Commercial/ Residential Makati (outside CBD) 5 Residential Alabang 3 18 Commercial Las Piñas 130 Residential Quezon City 4 56 Commercial/ Residential Manila / Pasay 5 3 Commercial/ Residential Pasig 6 4 Residential

Metro Manila 309 Canlubang 7 1,434 Residential/ Industrial/ Commercial Laguna (ex-Canlubang) 8 642 Residential/ Industrial Cavite 9 289 Residential Batangas/Rizal/Quezon 10 123 Residential

Calabarzon 2,488 Pampanga 11 22 Residential Naga 3 Residential Cabanatuan/ Baguio 71 Residential Bataan 12 289 Leisure/ Residential

Other Luzon Area 385 Bacolod/Iloilo 13 290 Residential Cebu 14 234 Commercial/ Residential Davao 70 Residential Cagayan De Oro 153 Residential

Visayas/Mindanao 747 TOTAL 3,929

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1 Makati includes sites of Mandarin Hotel (1.6 has.) and Peninsula Hotel (2.0 has.) which are 50% owned through Ayala Hotels, Inc., and remaining area at Roxas Triangle (0.5 ha.) which is 50% owned..

2 Taguig includes 9.8-ha. site of Market! Market! under lease arrangement with BCDA; 2-ha. in Serendra which is under joint development agreement with BCDA; 33 has. in Taguig is owned through Fort Bonifacio Development Corporation. For Market! Market!, the lease agreement with the BCDA covers a period of 25 years (renewable for another 25 years) and involves an upfront cash payment of =P700 million and annual lease payments with fixed and variable components. For Serendra, the joint development agreement with BCDA involves an upfront cash payment of =P700 million plus a guaranteed revenue stream totaling =P1.1 billion over an 8-year period.

3 Alabang pertains to the 17.6-ha. Alabang Town Center which is 50% owned through Alabang Commercial Corp. (ACC), 3.7 has. of which is subject of a Mortgage Trust Indenture as security for ACC’s short-term loans with Bank of the Philippine Islands. 4 Quezon City mainly includes 38 has. under lease arrangement with University of the Philippines and the 13-ha. site of TriNoma which is under lease arrangement with the Department of Transportation and Communication. TriNoma is 49% owned by ALI through North Triangle Depot Commercial Corp. 5 Manila/Pasay includes 2.1 has. (under development) which are under joint venture with Manila Jockey Club, Inc. and 0.3-ha. site of Metro Point which is 50% owned through ALI-CII Development Corp.

6 Pasig pertains to Alveo’s new project – Ametta Place. 7 Canlubang includes 1,216 has. which are 70% owned through Aurora Properties, Inc. and Vesta Holdings, Inc.; also includes 304 has. which are 60% owned through Ceci Realty, Inc. 8 Laguna (excluding Canlubang) includes 100 has. which are under a 50-50% joint venture with Greenfield Development Corp.; 19 has. in Laguna Technopark, Inc. which is 75% owned by ALI; and 3-ha. site of Pavilion Mall which is under 27-year lease arrangement with Extra Ordinary Group, with an option to renew every 5 years thereafter (lease payment is based on a certain percentage of gross income).

9 Cavite includes 20 has. in Riego de Dios Village which is under joint venture with the Armed Forces of the Philippines.

10 Batangas includes 17 has. in Sto. Tomas project which is under an override arrangement, while Quezon includes a 39-ha. property.

11 Pampanga pertains to the site of Avida and Alveo projects, and the newly-opened Marquee Mall. 12 Bataan pertains to the site of Anvaya Cove which is under joint development agreement with SUDECO. 13 Bacolod includes 69 has. in Ayala Northpoint which is under override arrangement. Iloilo includes a 21-ha. property.

14 Cebu includes about 10 has. in Cebu Business Park (including Ayala Center Cebu) which is 47% owned through Cebu Holdings, Inc. (CHI); 0.62-ha. hotel site owned by Ayala Hotels, Inc. and Cebu Holdings, Inc.; 8 has. in Asiatown IT Park which is owned by Cebu Property Ventures and Development Corporation which in turn is 76% owned by CHI; and 22 has. in Amara project, (66% owned by CHI) which is under joint venture with Coastal Highpoint Ventures, Inc. A 9.46-ha. Property (within the Cebu Business Park) which houses the Ayala Center Cebu is subject of a mortgage trust indenture securing term loan with Bank of the Philippine Islands; 0.62 has. is subject of a mortgage trust indenture securing Cebu Insular Hotel Company Inc.’s term loan with Bank of the Philippine Islands. Property Acquisitions With 3,929 hectares in its landbank as of December 31, 2009, ALI believes that it has sufficient properties for development in next twenty-five (25) years.

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Nevertheless, the Company continues to seek new opportunities for additional, large-scale, masterplanned developments in order to replenish its inventory and provide investors with an entry point into attractive long-term value propositions. The focus is on acquiring key sites in the Mega Manila area and other geographies with progressive economies that offer attractive potential and where projected value appreciation will be fastest. In a disclosure to the Securities and Exchange Commission dated August 27, 2009, ALI and the National Housing Authority (NHA) signed a Joint Venture Agreement to develop the 29.1-hectare North Triangle Property in Quezon City as a priming project of the government and the private sector. The joint venture represents the conclusion of a public bidding process conducted by the NHA which began last October 3, 2008. ALI’s proposal, which has been approved and declared by the NHA as compliant with the Terms of Reference of the public bidding and the NEDA Joint Venture Guidelines, features the development of a new Central Business District (CBD) in Quezon City. The CBD will be developed as the Philippines’ first transit-oriented mixed-use central business district that will be a new nexus of commercial activity. The proposal also aims to benefit the NHA in achieving its mandate of providing housing for informal settlers and transforming a non-performing asset into a model for urban renewal. The development will also generate jobs and revenues both for both local and national governments. ALI’s vision for the North Triangle Property is consistent with the mandate of the Urban Triangle Development (TriDev) Commission to rationalize and speed up the development of the East and North Triangles of Quezon City into well-planned, integrated and environmentally balanced, mixed-use communities. The joint venture also conforms with the NHA’s vision of a private sector-led and managed model for the development of the property, similar to the development experience in Fort Bonifacio. ALI’s track record, strong branding, and ability to attract top locators will ensure that the development will achieve its highest potential value. In the development and management of CBDs, ALI’s signature projects include the master-planned Makati CBD, Bonifacio Global City, Cebu Business Park, and Madrigal Business Park in Alabang. The total project cost is estimated at =P22 billion, inclusive of future development costs and the current value of the property, which ALI and the NHA will contribute as their respective equity share in the joint venture. ALI expects to start development within two years. Environmental Compliance ALI incurs no material costs in relation to compliance with environmental laws and regulations. Each of ALI and its subsidiaries, as a matter of corporate policy, either has secured or seeks to secure all relevant and applicable Government approvals such as environmental compliance certificates or certificates of non-coverage, development permits, and licenses to sell, as part of the normal course of their business. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 3 1, 2009 Revenues ALI posted a strong financial performance for the full year 2009 despite a challenging macroeconomic environment, especially in the first quarter of last year. Net income attributable to equity holders of ALI reached =P4.04 billion in 2009, nearly matching the record =P4.13 billion in earnings (excluding large transactions) generated the previous year. The Company’s quarterly financial performance also improved steadily, with the =P1.12 billion in net income attributable to equity holders of ALI generated in the fourth quarter of 2009 up 7% quarter-on-quarter and 16% year-on-year, respectively. This was achieved through

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a combination of relatively stable operating revenues from key business segments and effective cost control measures. Consolidated revenues of =P30.46 billion in 2009 were 10% lower than the =P33.75 billion recorded the previous year. The decline was accounted for mostly by the 8% drop in revenues from Real Estate and Hotel operations and the absence of capital gains from a large transaction, specifically the sale of the Valero lots in March 2008. Real Estate and Hotel operations revenues were lower, mostly on the Company’s decision to reduce its external third-party construction contracts while aggregate consolidated revenues from the company’s core residential and leasing operations remained flat. Despite the lower consolidated revenues, consolidated net operating income (NOI)2 reached =P9.03 billion in 2009, declining by only 3% from the =P9.33 billion posted the previous year. This reflected the overall improvement in blended NOI margins3 to 32% in 2009 from 31% the previous year. Shopping Centers and Corporate Business margins stabilized as leased-out rates in new malls and business process outsourcing (BPO) office buildings steadily moved up, while an improvement in Strategic Landbank Management margins offset the decline in Residential and Support Businesses margins which were hampered by high input costs at the start of the year. The improvement in NOI margins and a 16% reduction in General and Administrative Expenses (GAE) contributed to narrowing the gap between the after-tax Net Income attributable to equity holders of ALI (NIAT) of =P4.04 billion in 2009 compared with the =P4.81 billion (including large transactions) recorded in 2008. Business Segments The details of the individual performance of each business segment are discussed as follows: Residential Development Residential Development revenues amounted to =P14.23 billion in 2009, 6% lower than the =P15.22 billion posted the previous year, as the combined value of bookings for the three brands due to uncertain market conditions in the first quarter and a limited supply of new product launches in 2009. Ayala Land Premier revenues registered a decline of 15% to =P6.53 billion as the gradual recovery in demand was not met with adequate inventory. Meanwhile, Alveo Land and Avida Land both posted growth rates of 2% year-on-year. Alveo’s revenues reached =P4.03 billion while Avida’s reached =P3.67 billion as advancing percentages of completion on projects under construction offset the decline in new bookings. The Residential Business remained the biggest contributor to the Company’s NOI, accounting for 43% of total at =P3.85 billion. NOI margins dropped to 27% from 29% largely because the completion mix was weighted towards the lower-margin products. For 2010, the Company is anticipating a strong turn-around in market conditions and will be launching its most aggressive campaign ever, with over 9,200 units to be launched from 28 projects across all residential brands. 2010 will also be noteworthy for the Company’s initial foray into the economic housing segment through a newly established fourth brand known as Amaia Land Corporation, with a maiden project to be launched in Laguna within the first quarter. Shopping Centers Total revenues for Shopping Centers rose by 4% to =P4.44 billion in 2009 as its gross leasable area (GLA) portfolio increased with the opening of MarQuee Mall in Angeles, Pampanga last September 2009. Blended occupancy rates remained at 92% despite the Ayala Center redevelopmental-related closures in Glorietta 1 as well as the start-up operations of MarQuee Mall. Average building rent for all malls dropped by 5% to =P1,019 per square meter per month, mostly due to the lower average lease rates in MarQuee Mall. NOI for Shopping Centers meanwhile improved by 9% to =P2.34 billion and accounted for 26% of the Company’s total NOI. NOI margins also improved to 53% from 50% with the continued ramp-up of new

2 Revenue from real estate and hotel operations less costs related to real estate and hotel operations 3 NOI divided by revenue from real estate and hotel operations

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malls. For 2010, the Company will continue with the construction of its Abreeza Mall in Davao, which is expected to open in 2011. It is also expected to launch the Phase 2 development of Ayala Center Cebu, while breaking ground in several other provincial locations for both regional malls as well as its community and neighborhood center products. Corporate Business Revenues from Corporate Business nearly doubled to =P1.99 billion in 2009 from =P1.09 billion the previous year. The growth was derived largely from the expansion of the BPO office portfolio that reached a total of 178,160 square meters of leased-out GLA as of year-end 2009, compared with 82,224 square meters as of year-end 2008. Revenues were also boosted by higher average BPO lease rates that went up by 22% to an average of =P582 per square meter per month with the start of operations of two higher-yielding BPO office buildings in Makati in 2009 (Solaris One and Glorietta 5 BPO). Meanwhile, the performance of the headquarter-type (HQ) office buildings continued to be positive. Average lease rates for the HQ buildings increased by 4% to =P806 per square meter per month on programmed rental escalations as well as above-average renewal rental rates, with occupancy rates remaining high at 96%. NOI meanwhile increased by 86% to =P1.08 billion in 2009, accounting for 12% of the Company’s total. NOI margins also improved to 54% from 53% as a result of improving occupancy rates in the recently opened buildings. For 2010, the Company continues to see positive prospects for expansion in select locations and will begin construction on Two Evotech in Nuvali as well as several other BPO buildings in Luzon and the Visayas region. Strategic Landbank Management Revenues from Strategic Landbank Management Group (SLMG) amounted to =P2.26 billion in 2009, 24% higher than the previous year, largely due to the significant construction completion of its share in booked NUVALI residential and commercial lot sales. The strong revenue growth also led to an increase in NOI by 32% to =P832 million from =P632 million in 2008 (and contributed 9% to total NOI). NOI margins likewise improved to 37% from 35% with a greater percentage of construction accomplishment in higher-margin lots in NUVALI. Visayas-Mindanao Revenues from Visayas-Mindanao improved by 20% to =P194 million in 2009 from =P161 million the previous year. Most of the revenue growth came from increasing percentage completion at Alegria Hills in Cagayan de Oro and from higher bookings in new phases of Plantazionne Verdana Homes in Negros Occidental. NOI contribution was =P17 million, or less than 1% of total. Support Businesses The Support Businesses, namely Construction, Property Management and Hotels, generated revenues (net of inter-company eliminations) of =P4.96 billion in 2009, 38% lower than the =P8.05 billion posted the previous year. The decline was a result of the winding down and subsequent lower contribution from external construction projects as the Company deliberately adopted a strategy of focusing more on internal construction. Consequently, NOI for the Support Businesses in aggregate also dropped by 44% to =P909 million, or 10% of total. Overall margins were likewise lower at 18% compared with 20% the previous year, although these stabilized in the second half of 2009, compared with a larger average year-on-year drop in the first two quarters of last year. Equity in Net Earnings of Investees, Interest, Fees , Investment and Other Income Equity in Net Earnings of Investees grew by 9% to =P968 million from =P885 million, mostly from the contribution of Fort Bonifacio Development Corporation (in which the Company holds an effective stake of

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24.8%) and the improved performance of shopping center joint ventures accounted for under the equity method (particularly TriNoma and Alabang Town Center). Meanwhile, Interest, and Other Income decreased by 37% to =P1.41 billion in 2009 compared with the =P2.25 billion the previous year. Higher management fees and interest income on higher average cash balances in 2009 were not enough to compensate for the absence of capital gains derived from the sale of shares in wholly-owned subsidiaries Piedmont Property Ventures, Inc., Stonehaven Land, Inc. and Streamwood Property, Inc. in March 2008. Expenses Total expenses dropped to =P26.42 billion in 2009, 9% lower than the =P28.94 billion recorded in 2008. Cost of Sales from Real Estate and Hotels, which accounted for the bulk at =P19.02 billion, declined by 11%, reflecting the strong project cost control initiatives. GAE was also contained at =P2.79 billion, dropping by 12% from the previous year with savings from a corporate restructuring program in 2008 as well as strong cost control initiatives implemented in 2009. Meanwhile, Interest Expense, Financing and Other Charges went up by 52% to =P2.80 billion, mostly due to the increase in average loan balances for 2009 as the Company ramped up its borrowing program. Project and Capital Expenditures ALI spent a total of =P16.24 billion for project and capital expenditures in 2009, 14% less that the record =P18.89 billion spent in 2008. Residential Development accounted for 60% of the total, followed by Strategic Landbank Management with 17% and Shopping Centers and Corporate Business each accounting for 8% of total. For 2010, the Company has earmarked a new record high of =P27.17 billion for capex as it expects its most aggressive year ever with record product launches and activity levels across all product segments. The capex allocation is expected to cover expenses related to the launch of new residential and leasing projects, the ongoing construction completion of existing projects under development, as well some possible land acquisition as the Company seeks to expand its presence in more growth centers across the country. Financial Condition The Company’s financial position continues to be robust with a close to zero net-debt position and significant capacity to take on additional borrowings to support its aggressive growth plans for the next few years. Cash and Cash Equivalents stood at =P10.53 billion with a Current Ratio4 of 1.95:1. Total Borrowings as of year-end 2009 stood at =P18.81 billion, compared with =P16.75 billion as of December 2008, translating to Debt-to-Equity Ratio5 of 0.36:1 and a Net Debt-to-Equity6 Ratio of 0.05:1. The Company has been managing its debt profile effectively, with 91% in long-term debt (with 84% of total carrying a fixed-rate) and an average borrowing rate of 7.9% down from 8.0% the previous year. The Company’s borrowings carry an average maturity tenor of 4.4 years. In order to support its expansion plans, the Company intends to continue ramping-up its borrowing program in 2010.

4 Current assets divided by current liabilities 5 Total of short-term debt and long-term debt divided by equity attributable to equity holders of AL 6 Total debt less total of cash and cash equivalents, short-term investments, financial assets at fair value through profit or loss and current portion of available-for-sale investments divided by equity attributable to equity holders of ALI

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II. Financial Services Ayala is engaged in banking through its affiliate, Bank of the Philippine Islands (“BPI”). As of December 31, 2009, Ayala effectively owned 33.5% of BPI common shares. Bank of the Philippine Islands Description of Business As of the date of this Prospectus, BPI is the third largest commercial bank in the Philippines in terms of total assets, and second overall in deposits, loans and capital. It has the second biggest market share in trust banking. It is the largest consumer lender and the top commercial bank in OFW remittances. The bank also enjoys a significant presence in corporate finance, securities distribution and insurance business. BPI provides a wide range of corporate and commercial banking products and services such as credit, trade-related services, cash management services and financial advice to large- and medium-sized corporations and institutions in the Philippines. It provides traditional short- and long-term financing as well as products and services such as trade acceptances and bills of exchange for such customers. BPI is among the leading banks in the consumer banking business in the Philippines. Its services include mortgage lending, automobile financing, deposit taking, electronic banking, remittance and foreign exchange, credit card operations and private banking. BPI has a network of 831 branches, including 177 kiosks that are typically located in shopping malls, supermarkets and transport stations. BPI is a recognized leader in electronic banking, having introduced most of the firsts in the industry, such as automated teller machines (“ATMs”), a point-of-sale debit system, kiosk banking, phone banking, Internet banking and mobile banking. BPI has 1,484 ATMs and accounts for the biggest share in the BPI ExpressNet consortium of 3,503 ATMs. Other major shareholders of BPI as of December 31, 2009 are Development Bank of Singapore (“DBS”) (20.3%) and the Roman Catholic Archdiocese of Manila Group (8.5%). Principal Subsidiaries The bank’s principal subsidiaries are listed below. 1. BPI Family Savings Bank, Inc. serves as BPI’s primary vehicle for retail deposits, housing loans and auto finance. It has been in business since 1985. It acquired Shenton Realty Corporation in December 2004. 2. BPI Capital Corporation is an investment house concentrating in corporate finance and the securities distribution business. It began operations as an investment house in December 1994. It wholly owns BPI Securities Corporation, a stock brokerage company with a seat in the PSE. 3. BPI Leasing Corporation is a quasi-bank concentrating in lease finance. It was originally established as Makati Leasing and Finance Corporation in 1970. Its quasi-banking license was inherited from the merger with Citytrust Investment Phils., Inc. in May 1998. 4. BPI Direct Savings Bank is a savings bank focused on providing internet and mobile banking services to its customers. It started operating as such on February 17, 2000 upon approval of the BSP. 5. BPI International Finance Limited, Hong Kong is a deposit taking company in Hong Kong. It was originally established in August 1974.

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6. Bank of the Philippine Islands (Europe) Plc is a wholly owned subsidiary of BPI, which was granted a UK banking license by the Financial Services Authority on April 26, 2007. It was officially opened to the public on October 01, 2007.

7. BPI Express Remittance Corp. (U.S.A.) is a remittance center for overseas Filipino workers incorporated on September 24, 1990.

8. Ayala Life Assurance Inc. is a life insurance company acquired by BPI through its merger with Ayala Insurance Holdings Corp. (“AIHC”) in April 2000. It was originally established in 1933 as Filipinas Life Assurance Co. and has a 100% owned pre-need subsidiary called Ayala Plans.

9. BPI/MS Insurance Corporation is a non-life insurance company formed through a de facto merger of FGU Insurance Corporation and FEB Mitsui Marine Insurance Company on January 7, 2002.

BPI merged with Far East Bank and Trust Co., Inc. and AIHC in 2000. In September 2005, BPI acquired 92% of the share capital of Prudential Bank, Inc. (“Prudential Bank”). BPI merged with Prudential Bank on December 29, 2005, wherein approximately ten million BPI shares were issued to the 8% Prudential Bank minority shareholders. In October 2005, the stockholders of Universal Malayan Reinsurance (“UMRe”), the reinsurance company formed thru the merger of Universal Reinsurance Corporation (“UNIRE”), a BPI subsidiary with Malayan Reinsurance Corporation, a subsidiary of the Yuchengco Group of Companies, and National Reinsurance Corporation of the Philippines (“NRCP”) approved the plan of merger of UMRe and NRCP, with NRCP as the surviving entity. Competition The Philippine banking industry has seen a significant increase in the number of commercial banks, especially since the liberalization of operations by foreign banks. The number of commercial banks increased from approximately 30 prior to liberalization to more than 50. However, as of June 30, 2008, the number of universal and commercial banks had declined to 36 as a result of mergers and closures. Competition has remained intense despite the industry consolidation. Loan requirements, especially from the top tier corporate sector, while still predominantly for working capital, have slightly recovered on stronger credit demand from power, real estate, business process outsourcing, as well as tourism related sectors. The top corporations though have been the focus of foreign banks, resulting in narrower margins for this market segment. It is in the buoyant SME and middle market where lending opportunities are better, and where most of the domestic banks’ emphasis has been directed. A number of foreign banks though as well as most domestic banks, have entered the growing consumer market where BPI is a major player. BPI believes that its competitive advantages include, aside from the extensive delivery infrastructure, its experience in efficient management of operations such as loan origination, credit approval, collection and asset recovery activities. Financial Condition as of December 31, 2009 The Bank of the Philippine Islands (BPI) registered strong business volume and revenue growth in 2009. Full year unaudited net income rose to =P8.5 billion, 33% higher than 2008, and equivalent to a 13% Return on Average Equity and a 1.3% Return on Average Assets. Correspondingly, net income for the fourth quarter of 2009 was 7% better than 2008. Unaudited total resources ended at =P724 billion, 9% higher than previous year. Total funds managed by the Bank increased by =P187 billion or 22% and now stands at over =P1 trillion. Deposits expanded by 7% to =P579 billion and assets under management increased by a hefty 50% to =P435 billion.

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Overall net loans grew only 2%, primarily due to multinationals paying down their loans by 22%. However, Credit Cards receivables grew 16%, SME loans 11%, consumer loans grew 10%, and local middle market names 9%. Clearly, multinational and top tier domestic lending were challenged by high liquidity and availability of funding through the capital markets. Total remittances grew 15%, as against projections of an industry growth of 5%. BPI continued to capture over 20% of the overseas Filipino remittance business. BPI also launched a Bank Anywhere capability by which a client can transact at any BPI branch and not be confined to their home branch. This, together with superior availability and reliability during Typhoons Ondoy and Pepeng, resulted in low cost deposit funds growing 20% during the year. To extend market reach and refine its product suite, BPI implemented two joint ventures with strategic partners - BPI Globe BanKO, a mobile microfinance bank with Ayala Corporation and Globe; and BPI-Philam Life Assurance, Inc., a bancassurance platform with Philippine American Life Insurance Company. Total revenues improved by 15% with increments contributed by both net interest and non-interest income. Net interest income was ahead by 10% on account of the 9% expansion in average asset base and a slight improvement in net spreads. Non-interest income recorded a higher 25% largely on account of securities trading gain of =P1.4 billion as against losses the previous year. Other income also exhibited positive gains from income from asset sales, rental income, income from insurance operations and various fees and commissions. BPI set aside =P2.5 billion in impairment losses, =P605 million higher than a year ago. The BSP net 30-day non-performing loan ratio though fell to 2.8% and reserve cover further improved to 87.3%. Operating expenses were 7% ahead of previous year due to manpower and premises-related expenses. Income taxes was =P463 million higher than the previous year in view of the higher level of write-offs of deferred income tax on net operating loss carry-over (NOLCO). BPI issued its first Sustainability Report for 2008 along the Global Reporting Initiatives (GRI) Sustainability Reporting Guidelines, the first in the banking industry. BPI was also recognized as the ‘Most Sustainable Bank, Philippines’ in the New Economy Sustainability Banking Awards 2009.

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III. Telecommunications Ayala conducts its telecommunications business through its business affiliate, Globe Telecom. Inc. (“Globe”). As of December 31, 2009, Ayala effectively owned 30.5% of Globe common shares.

Globe Telecom, Inc.

Overview Globe is a major provider of telecommunications services in the Philippines, supported by over 5,000 employees and over 740,000 retailers, distributors, suppliers, and business partners nationwide. Globe operates one of the largest and most technologically-advanced mobile, fixed line and broadband networks in the country, providing reliable, superior communications services to individual customers, small and medium-sized businesses, and corporate and enterprise clients. Globe currently has over 23 million mobile subscribers, over 700,000 broadband customers, and almost 600,000 landline subscribers. Globe is also one of the largest and most profitable companies in the country, and has been consistently recognized both locally and internationally for its corporate governance practices. It is listed on the Philippine Stock Exchange under the ticker symbol GLO and had a market capitalization of US$2.6 billion as of the end of 2009. Globe’s principal shareholders are Ayala Corporation and Singapore Telecom, both industry leaders in the country and in the region. Aside from providing financial support, this partnership has created various synergies and has enabled the sharing of best practices in the areas of purchasing, technical operations, and marketing, among others. As of December 31, 2009, Ayala owned 30.6% of Globe’s outstanding common shares while Singapore Telecom International (“STI”), a wholly owned subsidiary of Singapore Telecom, owned 47.6%. Asiacom Philippines, Inc., a holding company that currently owns all of Globe’s outstanding preferred shares, is 60% owned by Ayala and 40% by STI. Globe is committed to being a responsible corporate citizen. Globe BridgeCom, Globe’s umbrella corporate social responsibility program, leads and supports various initiatives that (1) promote education and raise the level of computer literacy in the country, (2) support entrepreneurship and micro-enterprise development particularly in the countryside, and (3) ensures sustainable development through protection of the environment and excellence in operations. Since its inception in 2003, Globe BridgeCom has made a positive impact on the lives of thousands of public elementary and high school students, teachers, community leaders, and micro-entrepreneurs throughout the country. The Globe Group is composed of the following companies: a) Globe Telecom, Inc. (Globe) provides mobile telecommunications services; b) Innove, Communications Inc. (Innove), a wholly-owned subsidiary, which provides fixed line

telecommunications and consumer broadband services, high-speed internet and private data networks for enterprise clients, services for internal applications, internet protocol-based solutions and multimedia content delivery;

c) G-Xchange, Inc. (GXI), a wholly-owned subsidiary, provides mobile commerce services under the GCash brand;

d) Entertainment Gateway Group Corp. and EGGstreme (Hong Kong) Limited (EHL) (collectively referred here as EGG Group), a wholly-owned subsidiary provides digital media content and applications; and

e) GTI Business Holdings, Inc. (GTI), a wholly-owned subsidiary is primarily an investing company. It has a wholly owned subsidiary, GTI Corporation which is organized under the General Corporation Law of the State of Delaware and has not yet started commercial operations as of December 31, 2009.

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Globe is a grantee of various authorizations and licenses from the National Telecommunications Commission (NTC) as follows: (1) license to offer and operate facsimile, other traditional voice and data services and domestic line service using Very Small Aperture Terminal (VSAT) technology; (2) license for inter-exchange services; and (3) Certificate of Public Convenience and Necessity (CPCN) for: (a) international digital gateway facility (IGF) in Metro Manila, (b) nationwide digital cellular mobile telephone system under the GSM standard (CMTS-GSM), and (c) nationwide local exchange carrier (LEC) services after being granted a provisional authority in June 2005. Business Segments Mobile Business Globe provides digital mobile communication services nationwide using a fully digital network based on the Global System for Mobile Communication (GSM) technology. It provides voice, data and value-added services to its mobile subscribers through three major brands: Globe Postpaid, Globe Prepaid and TM.

Globe Postpaid includes all postpaid plans such as regular G-Plans, consumable G-Flex Plans, Load Allowance Plans, Time Plans, Apple™ iPhone 3G plans and high-end Platinum Plans. To serve the needs of specific market segments and promote loyalty, Globe introduced various innovative postpaid plans including the Load Tipid Plans which allow subscribers to control their spend and set their plan limits based on their usage profiles. The subscriber can reload their account just like any prepaid subscriber if their actual consumption exceeds their fixed credits. Meanwhile, for those subscribers who want to upgrade their mobile internet browsing experience, Globe introduced Personal Blackberry and Mobile Surfing add-on plans which entails additional monthly fees on top of their regular monthly postpaid subscription fees. Globe Prepaid, Globe Tattoo, and TM are the prepaid brands of Globe. The Globe Tattoo brand is targeted towards the youth segment with its convergent mobile and broadband offerings, while the TM brand caters to the value-conscious segment of the market. Globe Prepaid is targeted towards the adult, mainstream market. Its unique brand proposition revolves around its innovative product and service offerings, superior customer service, and Globe’s “worldwidest” services and global network reach. Globe offers various top-up or reloading options and facilities for prepaid subscribers including prepaid call and text cards, bank channels such as ATMs, credit cards and through internet banking. Subscribers can also top-up at over 740,000 AutoLoad Max retailers nationwide, all at affordable denominations and increments. A consumer-to-consumer top-up facility, Share-A-Load, is also available to enable subscribers to share prepaid load credits via SMS. Globe’s AutoLoad Max and Share-A-Load services are also available in selected OFW hubs all over the world. Mobile Voice Globe’s voice services include local, national and international long distance call services. It has one of the most extensive local calling options designed for multiple calling profiles. In addition to its standard, pay-per-use rates, subscribers can choose from bulk and unlimited voice offerings for all-day or off-peak use, and in several denominations to suit different budgets.

Globe pioneered international roaming in 1995 and now has one of the widest networks with over 500 roaming partners in more than 200 calling destinations worldwide. Globe also offers roaming coverage on-board selected shipping lines, airlines and via satellite. Through its Globe Kababayan program, Globe also provides an extensive range of international call and text services to allow OFWs (Overseas Filipino Workers) to stay connected with their friends and families in the Philippines. This includes prepaid and reloadable call cards and electronic PINs available in popular OFW destinations worldwide.

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Mobile Data and Value-Added Services Globe’s data services include local and international SMS offerings, mobile browsing and content downloads. Globe has introduced various bucket and unlimited SMS packages to cater to the different needs and lifestyles of its postpaid and prepaid subscribers. Additionally, Globe subscribers can send and receive Multimedia Messaging Service (MMS) pictures and video, or do local and international 3G video calling. Globe’s mobile browsing services allow subscribers to access the internet using their internet-capable handsets or laptops with USB modems. Data access can be made using various technologies including 3G with HSDPA, EDGE and GPRS. Browsing subscribers now have multiple charging options with Globe’s Flexible Mobile Internet Browsing rates which allow subscribers to choose between time or usage-based rates. They can also choose between daily or monthly browsing plans. Globe also offers a full range of downloadable content covering multiple topics including news, information, and entertainment through its web portal. Subscribers can purchase or download free music, movie pictures and wallpapers, games, mobile advertising, applications or watch clips of popular TV shows and documentaries as well as participate in interactive TV, mobile chat and play games, among others.

Through Globe’s partnership with major banks and remittance companies, and using Globe’s pioneering GCash platform, subscribers can perform mobile banking and mobile commerce transactions. Globe subscribers can complete international and domestic remittance transactions, pay fees, utility bills and income taxes, avail of micro-finance transactions, donate to charitable institutions, and buy Globe prepaid load credits using its GCash-activated SIM. Fixed Line and Broadband Business Globe offers a full range of fixed line communications services, wired and wireless broadband access, and end-to-end connectivity solutions customized for consumers, SMEs (Small & Medium Enterprises) and large enterprises and businesses. To better serve the various needs of its customers, Globe organized dedicated customer facing units (CFUs) within the company to focus on the integrated mobile and fixed line needs of specific market segments. There are consumer marketing and sales groups to address the needs of retail customers, and a business CFU focused on the needs of big and small businesses. Globe Business was created and organized along two main segments – Corporate and SME (CSME) and Enterprise Businesses. These groups provide end-to-end mobile and fixed line solutions and are equipped with their own technical and customer relationship teams to cater to the requirements of their specific client base. Fixed Line Voice Globe’s fixed line voice services include local, national and international long distance calling services in postpaid and prepaid packages through its Globelines brand. Subscribers get to enjoy toll-free rates for national long distance calls with other Globelines subscribers nationwide. Additionally, postpaid fixed line voice consumers enjoy free unlimited dial-up internet from their Globelines subscriptions. Low-MSF and fixed line bundled with internet plans are available nationwide and can be customized with value-added services including multi-calling, call waiting and forwarding, special numbers and voice mail. For corporate and enterprise customers, Globe offers voice solutions that include regular and premium conferencing, enhanced voice mail, IP-PBX solutions and domestic or international toll free services.

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Fixed Line Data Fixed line data services include end-to-end data solutions customized according to the needs of businesses. Globe’s product offering includes international and domestic data services, wholesale and corporate internet access, data center services and segment-specific solutions customized to the needs of targeted industries. Globe’s international data services provide its corporate and enterprise customers with the most diverse international connectivity solutions through a variety of dedicated communications services that allow customers to manage their own virtual private networks (VPN), subscribe to wholesale internet access via managed international private leased lines (IPL), run various applications and access networks with integrated voice services over high-speed, redundant and reliable connections. In addition to bandwidth access from multiple international submarine cable operators, Globe also has two international cable landing stations situated in different locales to ensure redundancy and network resiliency. Its domestic data services include data center solutions such as business continuity and data recovery services, 24x7 monitoring and management, dedicated server hosting, maintenance for application-hosting, managed space and carrier-class facilities for co-location requirements and dedicated hardware from leading partner vendors for off-site deployment. Other fixed line data services include access services that deliver premium-grade access solutions combining voice, broadband and video offerings designed to address specific connectivity requirements. These include Broadband Internet Zones (BIZ) for broadband-to-room internet access for hotels or Internet Exchange (GiX) services for bandwidth-on-demand access packages based on average usage. Broadband Globe offers wired, fixed wireless, and fully mobile internet-on-the-go services across various technologies and connectivity speeds for its residential and corporate customers. Wired or DSL broadband packages bundled with voice or broadband data-only services are available at download speeds ranging from 256 kbps up to 3 mbps. In selected areas where DSL is not yet available, Globe offers a fixed wireless broadband service using its WiMax network as a cost-effective alternative to wired broadband. For consumers who require a fully mobile internet-on-the-go broadband connection, Globe Broadband Tattoo service allows subscribers to access the internet via 3G with HSDPA, EDGE, GPRS or Wi-Fi at hotspots nationwide using a plug-and-play USB modem at speeds of up to 2 mbps. This service is available in both postpaid and prepaid packages. In addition, consumers who require faster connections have the option to subscribe to Globe’s Hyper Speed broadband plans using leading edge GPON technology with speeds of up to 100 mbps. Distribution Methods of Products and Services Wireless Business Independent Dealers Globe utilizes a number of independent dealers who have their own networks throughout the Philippines to sell its prepaid wireless services to customers. These dealers include major distributors of wireless phone handsets who usually have their own retail networks, direct sales force and sub-dealers in the Philippines. Globe compensates its dealers based on the type, volume and value of reload denominations for a period. This takes the form of fixed discounts for prepaid airtime cards and SIM packs, and discounted selling price for phone kits. Additionally, Globe has dealers who offer prepaid reloading services to Globe and TM subscribers nationwide. In 2003, Globe launched its Globe AutoLoadMAX service and established a distribution

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network of dealers and institutions to offer prepaid reloading services. As at December 31, 2009, Globe AutoLoadMAX was available in over 672,000 active retailers nationwide. Business Centers In addition to independent dealers, Globe has wireless business centers in major cities across the country. Through the business centers, customers are able to subscribe to wireless services, reload prepaid credits, make GCash transactions, purchase handsets, accessories, request handset repairs, try out the communications devices, ask questions about Globe’s services and pay bills. Globe’s business centers are also registered with the Bangko Sentral ng Pilipinas (“BSP”) as remittance outlets. Direct Sales Globe also distributes prepaid products (phone kits, SIM kits and prepaid air time cards and credits) through consumer distribution channels such as convenience stores, gas stations, drugstores, bookstores, photoshops and fastfood outlets. Globe also has a dedicated direct sales force to manage its corporate accounts and high-end customers – Corporate Managed Accounts, SME for Corporate Non-Managed Accounts, Direct Sales, VIP Sales and OFW Sales teams. Globe’s retail business centers and internal corporate sales staff act as direct sales channels. Overall, Globe plans to continue developing direct sales capabilities through retail business centers and internal corporate sales staff. This strategy enables Globe to better control product pricing, ensure the quality of staffing and service and integrate store marketing with media advertising. Wireline Business Globelines Payments and Services (”GPS”) Centers To better serve its wireline subscribers from various service areas such as Metro Manila, the Visayas area and the fast growing provinces of Cavite, Batangas and Central Mindanao, Innove has set up GPS centers in strategic locations in its service areas nationwide. Innove’s GPS centers enable subscribers to subscribe for wireline services, make GCash transactions, ask questions about services, and pay bills. Corporate Sales Team Globe also sells its wireline data services through its internal corporate sales team composed of account managers based in key cities nationwide. Sales to large businesses are managed by specialized account managers who are each dedicated to managing large business customers based on identified target segments. They are the appointed single points of contact (“SPOC”) for any service or concern the corporate customer may have, backed up by a strong team of pre-sales engineers, segment marketing managers and project managers. Sales to small and medium-sized enterprises are handled by Globe Bizworks while two business groups under the Enterprise Business Group serve markets for integrated wireless and wireline communications solutions. The Customer Support Group and Fault Management Control Center handles after-sales support for non-technical and technical concerns, respectively. Reseller Network Innove has its Channels program to manage its network of resellers. A Premium Business Partner program was also developed to oversee a network of system integrators (“SI”) to support its sales team and its overall value proposition.

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Service Areas Armed with a nationwide local exchange franchise from the NTC, Innove will roll-out additional lines over the next three-year period where it sees demand from business and residential subscribers, in addition to its current service areas in Metro Manila, Cavite, Batangas, the Visayas and Central Mindanao. Market Coverage Network Buildup Globe continues to invest in expanding and enhancing the resiliency of its mobile network. Globe has widened its nationwide reach, with cumulative 2G cell sites at 6,446 as of December 31, 2008, bringing geographic coverage to 97% and population coverage to 99%. Regional Expansion Globe generates a significant portion of its service revenues from international long distance (ILD) voice services, covering calls between the Philippines and more than 200 countries worldwide. Globe also has over 500 roaming partners. In 2004, Globe joined the Bridge Alliance to enable it to offer a suite of mobile services and benefits to its subscribers while roaming in the Bridge Alliance countries. Globe continues to seek tie-ups in the overseas markets and introducing relevant offers to the OFW communities to further grow its ILD business. Broadband Deployment Globe is expediting the roll-out of its broadband network to support an intensified push into the at-home broadband and broadband-on-the-go markets. Globe is expanding its broadband network nationwide using both wired and wireless technologies. Its DSL and 3G with HSDPA service is now available in key broadband markets nationwide, with its network footprint still expanding. To provide resiliency and geographic diversity to Globe’s existing cable systems, Globe is also participating in the TGN-Intra Asia Cable System, an international submarine cable project spearheaded by Tata Communications of India. This cable system will link the country to Japan, Hong Kong, and Singapore with onward connectivity to the US. The Philippine leg will terminate in Globe’s second landing station located in Northern Luzon. Globe will be the exclusive landing party in the Philippines for this cable system. Competition Wireless Market The Philippine wireless market has experienced rapid growth in recent years. Accordingly, the number of wireless subscribers increased from 1.6 million as of December 31, 1998 to 50.5 million as of December 31, 2007. Wireless penetration rates have surged from 1.4% in 1996 to 63.8% as total wireless subscribers reached 57.9 million by September 30, 2008. Over the past years, the great majority of cellular growth has taken place specifically within the digital GSM segment. Six wireless operators in the Philippines, including Globe, have been granted licenses to provide nationwide wireless service. Wireless operators are free to choose the network technology that they wish to deploy.

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Since 2000, the wireless communications industry has experienced consolidation. PLDT completed its acquisition and consolidation of Smart and Piltel and Globe acquired Islacom (now named Innove Communications, Inc.). Currently, Smart and Globe are the two leading wireless operators in the Philippines in terms of subscribers and revenues. Digitel began its network in 2000 and formally launched its wireless service under the brand name Sun Cellular in February 2003. Wireless subscriber growth in the Philippines has been driven by the unique topography and demographics of the Philippines. It is comprised of more than 7,100 islands and over 50% of its population is below the age of 25. This young and technologically-adept population coupled with the wide geographic expanse of the country has favored wireless, rather than wireline communication systems. With mass market appeal, the increasing affordability of wireless handsets and services, and the wide coverage of wireless networks have been key drivers in the growth of wireless subscribers in the Philippines. The popularity of wireless voice and data services have also been driven in part by the continued growth of the prepaid service which permits customers who do not meet the credit standards for postpaid service or who have different needs from that of postpaid subscribers, to avail of wireless service. SMS, pioneered by Globe in 1994, continues to be the most popular form of wireless data service for the mass market. The past several years have seen industry SIM growth rates go back to double-digit levels, although still below the exponential growth it witnessed in the years before. This moderate growth can be attributed to efforts by major wireless players to cater to a wider range of wireless users in lower income groups. The entry of new players has also brought on increased competition in the industry, characterized by aggressive price-based offers and subscriber acquisition programs. Wireline Voice Market The Philippine wireline voice market is relatively fragmented with eight (8) major local exchange carriers (LEC) and eleven (11) international gateway facility providers. The major LEC operators are PLDT, Digitel, Bayantel, and Globe (through Innove). PLDT (as incumbent operator) continues to hold a dominant market share even after the telecom industry was opened up to competition and liberalized in 1994. PLDT and Globe are authorized to provide wireline voice services nationwide, while all the other major providers are assigned regional service areas. The NTC has defined fifteen (15) service areas with up to two competitors to PLDT in most service areas. With respect to tariffs, rates for local exchange and domestic long distance services have been deregulated and operators are allowed to have metered as well as flat monthly fee tariff plans for the services provided. Over the past three years, several industry players, including Globe, Bayantel, and PLDT, have introduced fixed wireless voice services that provided some mobile phone capabilities but had the tariff structure of a wireline voice service. Subscribers to this fixed wireless voice service were able to enjoy limited mobility while being charged fixed monthly fees. Industry size has been relatively flat, with the number of lines in service remaining in the 3 million mark over the past few years. Fixed line revenue growth has likewise been flat to declining, given the steady shift in voice traffic to mobile. Wireline Data Market The corporate wireline data service business is a growing segment of the wireline industry. As the Philippine economy grows, businesses are increasingly utilizing new networking technologies and the

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internet for critical business needs such as sales and marketing, intercompany communications, database management and data storage. The potential of corporate data is becoming more visible as it serves the promising IT Enabled Service industry which includes call centers and Business Process Outsourcing companies. Dedicated business units have been created and organized within Globe to focus on the wireless and wireline needs of specific market segments and customers – be they residential subscribers, wholesalers and other large corporate clients or smaller scale industries. This reorganization has also been driven by Globe’s corporate clients’ preferences for integrated mobile and fixed line communications solutions. Globe’s dedicated business units include complete and dedicated technical and customer relationship teams to serve its various markets. International Long Distance Market International long distance (“ILD”) traffic in the Philippines has significantly increased over the years due to the growing overseas Filipino communities. ILD providers in the Philippines generate revenues from both inbound and outbound international call traffic whereby the pricing of calls is based on agreed international settlement rates. Both Globe and Innove offer ILD services, which cover international calls between the Philippines and over 200 countries. Settlement rates for international long distance traffic are based on bilateral negotiations. Commercial negotiations for these settlement rates are settled using a termination rate system where the termination rate is determined by the terminating carrier (e.g. Philippines) in negotiation with the originating foreign correspondent. Licenses, Patents and Trademarks Globe currently holds the following major licenses:

Service Type of License

Date Issued or Last Extended

Expiration Date

Globe Wireless CPCN (1) July 22, 2002 December 24, 2030 Local Exchange Carrier CPCN (1) July 22, 2002 December 24, 2030 International Long Distance CPCN (1) July 22, 2002 December 24, 2030 Interexchange Carrier CPCN (1) February 14, 2003 December 24, 2030 VSAT CPCN (1) February 6, 1996 February 6, 2021 International Cable Landing Station & Submarine Cable System (Nasugbu, Batangas)

CPCN (1) October 19, 2007 December 24, 2030

International Cable Landing Station & Submarine Cable System (Ballesteros Cagayan)

Provisional Authority

September 11, 2008 March 10, 2010

Innove Type of

License Date Issued or Last

Extended Expiration Date

Wireless CPCN (1) July 22, 2002 April 10, 2017 Local Wireline CPCN (1) July 22, 2002 April 10, 2017 International Long Distance CPCN (1) July 22, 2002 April 10, 2017 Interexchange Carrier CPCN (1) April 30, 2004 April 10, 2017

1 Certificate of Public Convenience and Necessity. The term of a CPCN is co-terminus with the franchise term.

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In July 2002, the NTC issued CPCNs to Globe and Innove which allow Globe to operate respective services for a term that will be predicated upon and co-terminus with Globe’s congressional franchise under RA 7229 (Globe) and RA 7372 (Innove). Globe was granted permanent licenses after having demonstrated legal, financial and technical capabilities in operating and maintaining wireless telecommunications systems, local exchange carrier services and international gateway facilities. Additionally, Globe and Innove have exceeded the 80% minimum roll-out compliance requirement for coverage of all provincial capitals, including all chartered cities within a period of seven years.

Globe also registered the following brand names with the Intellectual Property Office, the independent regulatory agency responsible for registration of patents, trademarks and technology transfers in the Philippines: Globe Telecom, Touch Mobile, Globelines, Globe Handyphone, Innove Communications, Globe Link, GlobeQuest, Globe Xchange, Globelines Broadband, Globe G-Cash, Globe AutoLoad, GlobeQuestDSL Broadband Internet, Broadband Mobility and “Hub and Circular Device” among others for the wireless and wireline services Globe offers. Globe has also secured certificates of registration for Globe Telecom, Globe Handyphone, Globe AutoLoad, GlobeQuest DSL Broadband Internet, Broadband Mobility, “Hub and Other Circular Device” and Innove Communications. Government Approvals/ Regulations The Globe Group is regulated by the NTC under the provisions of the Public Service Act (CA 146), Executive Order (EO) 59, EO 109, and RA 7925. Under these laws, Globe is required to do the following: a) To secure a CPCN/PA from the NTC for those services it offers which are deemed regulated

services, as well as for those rates which are still deemed regulated, under RA 7925. b) To observe the regulations of the NTC on interconnection of public telecommunications networks. c) To observe (and has complied with) the provisions of EO 109 and RA 7925 which impose an

obligation to rollout 700,000 fixed lines as a condition to the grant of its provisional authorities for the cellular and international gateway services.

d) Globe remains under the supervision of the NTC for other matters stated in CA 146 and RA 7925 and pays annual supervision fees and permit fees to the NTC.

On October 19, 2007, the NTC granted Globe a CPCN t o operate and maintain an International Cable Landing Station and submarine cable system in Nasugbu, Batangas On May 19, 2008, Globe announced that the NTC has approved the assignment by its wholly-owned subsidiary Innove of its Touch Mobile (TM) consumer prepaid subscriber contracts in favor of Globe. Globe would be managing all migrated consumer mobile subscribers of TM, in addition to existing Globe subscribers in its integrated cellular network. On September 11, 2008, the NTC granted Globe a PA to establish, install, operate and maintain an International Cable Landing Station in Ballesteros, Cagayan Province. Compliance with Environmental Laws The Globe Group complies with the Environmental Impact Statement (‘EIS’) system of the Department of Environment and Natural Resources (‘DENR’) and pays nominal filing fees required for the submission of applications for Environmental Clearance Certificates (‘ECC’) or Certificates of Non-Coverage (‘CNC’) for its cell sites and certain other facilities, as well as miscellaneous expenses incurred in the preparation of applications and the related environmental impact studies. The Globe Group does not consider these amounts material. Globe has not been subject to any significant legal or regulatory action regarding non-compliance to relevant environmental regulations.

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Key Performance Indicators

Globe is committed to enhancing shareholder value and to efficiently manage Globe’s resources. Globe regularly reviews its performance against its operating and financial plans and strategies, and use key performance indicators to monitor its progress. Some of its key performance indicators are set out below. Except for Net Income, these key performance indicators are not measurements in accordance with Philippine Financial Reporting Standards (“PFRS”) and should not be considered as an alternative to net income or any other measure of performance which are in accordance with PFRS. Gross Average Revenue Per Unit (Gross ARPU) Gross ARPU measures the average monthly gross revenue generated for each subscriber. This is computed by dividing recurring gross service revenues for a business segment for the period by the average number of the segment’s subscribers and then dividing the quotient by the number of months in the period. Net Average Revenue Per Unit (Net ARPU) Net ARPU measures the average monthly net revenue generated for each subscriber. This is computed by dividing recurring net service revenues of the segment for the period (net of discounts and interconnection charges to external carriers and content provider revenue share) by the average number of the segment’s subscribers and then dividing the quotient by the number of months in the period. Subscriber Acquisition Cost (SAC) SAC is computed by totaling marketing costs (including commissions and handset/SIM/device subsidies7) for the segment for the period divided by the gross incremental subscribers.

Average Monthly Churn Rate The average monthly churn rate is computed by dividing total disconnections (net of reconnections) for the segment by the average number of the segment’s subscribers, and then divided by the number of months in the period. This is a measure of the average number of customers who leave/switch/change to another type of service or to another service provider and is usually stated as a percentage. EBITDA EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is calculated as net service revenues less subsidy1, operating expenses and other income and expenses8. This measure provides useful information regarding a company’s ability to generate cash flows, incur and service debt, finance capital expenditures and working capital changes. As Globe’s method of calculating EBITDA may differ from other companies, it may not be comparable to similarly titled measures presented by other companies. EBITDA Margin EBITDA margin is calculated as EBITDA divided by total net service revenues. Total net service revenues are equal to total net operating revenues less non-service revenues. This is useful in measuring the

7 Handset/SIM subsidies represent the difference between the sales price collected from the subscriber and the original cost of the handset or SIM. 8 Operating expenses and other income and expenses do not include any property and equipment-related gains and losses and financing costs.

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extent to which subsidies, operating expenses (excluding property and equipment-related gains and losses and financing costs) and other income and expenses, use up revenue. EBIT EBIT is defined as earnings before interest, property and equipment-related gains and losses and income taxes. This measure is calculated by deducting depreciation and amortization from EBITDA. Globe Group’s method of calculating EBIT may differ from other companies, hence, may not be comparable to similar measures presented by other companies. EBIT margin calculated as EBIT divided by total net service revenues. Net Income As presented in the consolidated financial statements for the full year ended 31 December 2009 and 2008, net income provides an indication of how well the company performed after all costs of the business have been factored in. Dividend Policy The dividend policy of Globe as approved by the Board of Directors is to declare cash dividends to its common stockholders on a regular basis as may be determined by the Board. The dividend payout rate starting 2006 is approximately 75% of prior year’s net income payable semi-annually in March and September of each year. This is reviewed annually, taking into account Globe’s operating results, cash flows, debt covenants, capital expenditure levels and liquidity. On November 6, 2009, the Board of Directors amended the dividend payment rate from 75% to a range of 75% - 90% and declared a special dividend of P=50.00 per common share based on shareholders on record as of November 20, 2009 with the payment date of December 15, 2009. On February 4, 2010, the Board of Directors approved the declaration of the first semi-annual cash dividend of P=40.00 per common share, payable to shareholders on record as of February 19, 2010. Total dividends of P=5,293.84 million were paid on March 15, 2010. The following are the cash dividends declared and paid by Globe over the past three years.

CASH DIVIDEND (Per Share) AMOUNT

(Php) DECLARATION DATE RECORD DATE PAYMENT DATE

33.00 February 5, 2007 February 19, 2007 March 15, 2007 33.00 August 10, 2007 August 29, 2007 September 14, 2007 50.00 November 6, 2007 November 20, 2007 December 17, 2007 37.50 February 4, 2008 February 18, 2008 March 13, 2008 37.50 August 5, 2008 August 21, 2008 September 15, 2008 50.00 August 5, 2008 August 21, 2008 September 15, 2008 32.00 February 3, 2009 February 17, 2009 March 10, 2009 32.00 August 4, 2009 August 19, 2009 September 15, 2009 50.00 November 6, 2009 November 20, 2009 December 15, 2009

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Group Financial Highlights for the Year 2009

Globe Group

For the Year Ended

Results of Operations (Php Million) 31 Dec 2009

31 Dec 2008

YoY Change

(%)

Net Operating Revenues 1…………………………………………… 63,862 64,818 -1% Service Revenues

………………………………………………. 62,443 62,894 -1% Mobile…………………………………………………………. 53,321 55,436 -4% Fixed line Voice……………………………………………… 2,795 3,088 -9% Fixed line Data………………………………………………… 3,038 2,478 23% Broadband……………………………………………………. 3,289 1,892 74%

Non-Service Revenues…………………………………………. 1,419 1,924 -26% Costs and Expenses …………… …………………………………… 27,399 27,420 - Cost of Sales……………………………………………………….. 2,948 3,117 -5% Operating Expenses ……………………………………………… 24,451 24,303 1% EBITDA ………………………………………………………………… 36,463 37,398 -3% EBITDA Margin…………………………………………… …………. 57% 58% Depreciation and Amortization…………………………………… 17,388 17,028 2% EBIT …………………………………………………………………… 19,074 20,370 -6% EBIT Margin…………………………………………………………… 30% 31% Financing……………………………………………………………… (2,183) (3,000) -27% Interest Income……………………………………………………… 272 420 -35% Others - net…………………………………………………………… 810 56 1346% Provision for Income Tax…………………………………………… (5,404) (6,570) -18% Net Income After Tax (NIAT)……………………………………….. 12,569 11,276 11% Core Net Income 2 …………………………………………………… 12,003 11,765 2% 1 Consists of service and non-service revenues 2 Net income after tax (NIAT) excluding foreign exchange and mark-to-market gains (losses), and non-recurring items. • Consolidated service revenues for 2009 was at =P62.4 billion from =P62.9 billion in 2008. Mobile

revenues were down 4% due to intense competition and increasing preference of subscribers for value offers on the back of weak consumer economy. This was partially offset by a 74% improvement in broadband revenues driven by robust subscriber growth, and 23% growth in fixed line data revenues for the corporate and enterprise sectors. Mobile revenues accounted for 85% of total service revenues, down from 88% in 2008. Meanwhile fixed line and broadband increased its share of consolidated revenues from 12% to 15% in 2009.

• Operating expenses and subsidy increased by 2% year on year to =P26.0 billion from =P25.5 billion in 2008 driven by higher subsidies, rent and services partially offset by lower marketing costs and provisions. Network-related charges such as rent, electricity and fuel charges were higher compared to last year as a result of expanded 2G, 3G and broadband networks. Higher services costs were due to increases in costs for outsourced customer service and logistics functions. Marketing effectiveness ratio improved however with total marketing and subsidy expenses at 8% of service revenues compared to prior year’s 9%.

• Consolidated EBITDA and EBIT posted declines of 3% and 6% year on year on the back of softer revenues coupled with higher operating expenses. EBITDA and EBIT margins for 2009 were at 57% and 30%, respectively, from 58% and 31% in 2008 given the growing contribution of the lower-margin fixed line business to consolidated results. On a per-segment basis, Mobile EBITDA margins remained healthy at 65% of service revenues, while broadband and fixed line margins improved to 22% from 17% last year.

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• Globe closed the year with net income after tax of =P12.6 billion, 11% higher than 2008. Excluding foreign exchange, and mark-to-market gains and losses and non-recurring items, Globe’s core net income closed at =P12.0 billion or 2% higher than the previous year.

• Capital expenditures amounted to =P24.7 billion for the year, a 21% increase from last year’s =P20.4 billion. This included carry-over spend related to Globe’s participation in the TGN-IA international cable system, FOBN2 or Globe’s second fiber optic backbone network, domestic transmission loops, as well as the expansion and upgrades of Globe’s broadband and mobile networks. As of end 2009, Globe increased its base stations by 22% to 10,333 and cell sites by 7% to 6,226 to support its 2G, 3G and WiMax services. Geographical coverage stood at 97% while population coverage was at 99%. Total capex as a percentage of service revenues registered at 40% compared to last year’s 32%. Excluding the one-time investments, mobile capex as a percentage of mobile revenues was at 13%, within regional benchmarks for similarly mature markets.

• For 2010, Globe is allocating about US$500 million in capital expenditures. This includes US$170 million for the mobile telephony business, and another US$230 million for the broadband business to augment existing capacities and expand the coverage and footprint of Globe’s DSL, WiMax, and 3G broadband services. The 2010 capex plan also includes about US$50 million for Globe’s fixed line data networks which primarily caters to the corporate and enterprise sector. Finally, the investment plan also includes about US$50 million in additional one-time investments. This includes costs related to Globe’s participation in the new Southeast Asia Japan Cable (SJC) System which will link Singapore, Hong Kong, Indonesia, Philippines and Japan, and which will further increase the capacity and boost the resiliency of Globe’s international network. The SJC system is expected to be operational by 2012.

• Regular and special cash dividends paid out in 2009 amounted to =P15.1 billion. Total dividend payout of =P114 per share translates to a dividend yield of 14% based on beginning of year share prices. Total shareholder return for 2009 was at 30%. Return on equity9 was at 26%, up from 2008 level of 21% given the higher net profits and as a result of Globe’s capital management efforts.

Mobile Business

For the Year Ended

Mobile Service Revenues (Php Millions)

31 Dec 2009

31 Dec

2008

YoY

Change (%)

Service Voice1 ….…………………………………………………………………… 26,497 26,971 -2% Data 2..……………………………………………………………………… 26,824 28,465 -6% Mobile Service Revenues…………………..……................. .................. 53,321 55,436 -4% 1 Mobile voice service revenues include the following:

a) Monthly service fees on postpaid plans; b) Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid plans,

including currency exchange rate adjustments, or CERA, net of loyalty discounts credited to subscriber billings. c) Airtime fees for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or

expiration of the unused value of the prepaid reload denomination (for Globe Prepaid and TM) which occurs between 3 and 120 days after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus credits and (ii) prepaid reload discounts; and revenues generated from inbound international and national long distance calls and international roaming calls;

9 Net income divided by average equity

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Revenues from (b) and (c) are net of any interconnection or settlement payouts to international and local carriers and content providers.

2 Mobile data service revenues consist of revenues from value-added services such as inbound and outbound SMS and MMS, content downloading and infotext, subscription fees on unlimited and bucket prepaid SMS services net of any interconnection or settlement payouts to international and local carriers and content providers. Mobile Voice For 2009, Globe’s mobile voice service revenues accounted for 50% of total mobile service revenues compared to 49% in 2008. Mobile voice revenues of =P26.5 billion were 2% lower compared to 2008 as the growth in bulk and unlimited voice subscriptions were unable to fully offset the lower regular and IDD voice usage. During the year, Globe and TM sustained their bulk and unlimited voice offerings such as Tawag236 for a 20-minute call for =P20, Globe’s =P10 for a 3-minute call, and TM’s TodoTawag =P15 for a 15-minute call. Globe also sustained its per-second charging promo which allows subscribers to make on-net voice calls for only =P0.10 per second. To further drive adoption and encourage usage, Globe launched its “Walang Metro” campaign which includes a slew of unlimited product offers to provide subscribers more value services to suit their budget and needs. Globe launched the revolutionary DUO and SUPERDUO service, a two-in-one mobile and landline service, which enables subscribers to make unlimited landline-to-landline and mobile-to-mobile calls to any Globe and TM subscriber for only =P499 per month for postpaid, and =P35/day or =P599/month for prepaid subscribers. In addition, Globe introduced SUPER UNLI which allows 24x7 unlimited call and text to any Globe/TM subscriber nationwide for only =P150 for 5 days for both postpaid and prepaid subscribers. UNLIcall is also available in selected areas, providing subscribers with unlimited intra-network voice service for only =P30/day or =P100/5 days. Following the launch of its youth-oriented prepaid brand Globe Tattoo, Globe also introduced IMMORTALCALL+ - a unique bucket call and text service which includes a 5 minute call and 50 intra-network SMS with no expiry for only =P15. Mobile Data Globe’s mobile data business contributed 50% to total mobile net service revenues. Service revenues for the year totaled to =P26,824 million compared to =P28,465 million in 2008. While revenues from bucket, unlimited SMS subscriptions, and mobile browsing improved year on year, lower regular SMS and core value-added services usage declined, resulting in mobile data revenues that were 6% lower compared to 2008. To cater to the growing preference for bucket and unlimited SMS offers, Globe sustained its popular offerings such as Sulitxt, Everybodytxt, Astigtxt, UnliTxt, UnliTxt Dayshift and Nightshift and TodoText promotions. In addition, Globe introduced pioneering offerings such as ImmortalTxt, the first and only SMS offer in the industry with no expiry period. Globe also introduced Immortal Load – a prepaid load option with no expiry which can be used for voice, SMS or mobile browsing. The SMS allocations and prepaid load will not expire as long as the subscriber maintains at least =P1 in his prepaid wallet. To keep up with the needs of the growing youth segment, Globe introduced UnliChat+ which provides subscribers with unlimited intra-SMS and unlimited chat via Yahoo Messenger (YM). In addition, subscribers can enjoy unlimited intra-SMS, a 15-minute call and 10 off-net SMS with Globe’s UnliTxt Trio. To further encourage mobile browsing usage, Globe introduced mobile internet add-on plans to provide postpaid subscribers access to the internet using their Blackberry (starting at Plan700) or using regular handsets in tiered and affordable plans (starting at Plan149). Subscribers can also enjoy unlimited surfing through Super Surf which is an unlimited browsing add-on plan for an additional fee of =P1,200 per month, =P220 for 5 days or =P50 per day for postpaid subscribers. For prepaid users, subscribers can choose to do unlimited browsing with Surf All Day for only =P20 per day per site (including popular sites

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such as Facebook, Wikipedia, Plurk, Friendster, Twitter). Globe also launched entry-level iPhone plans starting at Plan399 following the launch of the new iPhone 3GS. Key Drivers for the mobile business are set out in the table below:

For the Year Ended

31 Dec 31 Dec YoY

2009 2008 * Change (%)

Cumulative Subscribers (or SIMs) Net (End of period )…… 23,245,006 24,646,600 -6% Globe Postpaid . ………………………………………………… 851,368 795,695 7% Prepaid .…………………………………………………………… 22,393,638 23,850,905 -6% Globe Prepaid ……………………………………………… 13,048,861 13,293,232 -2% TM …………………………………………………………… 9,344,777 10,557,673 -11% Net Subscriber (or SIM) Additions……………………… ……. (1,401,594) 4,338,251 -132% Globe Postpaid . ………………………………………………… 55,673 95,125 -41% Prepaid .…………………………………………………………… (1,457,267) 4,243,126 -134% Globe Prepaid ……………………………………………… (244,371) 1,175,157 -121% TM …………………………………………………………… (1,212,896) 3,067,969 -140% Average Revenue Per Subscriber (ARPU) Gross ARPU Globe Postpaid . ………………………………………………… 1,822 1,967 -7%

Prepaid

Globe Prepaid ………………………………………………… 241 279 -14%

TM …………………………………………………………… 124 135 -8%

Net ARPU Globe Postpaid . ………………………………………………… 1,283 1,394 -8% Prepaid Globe Prepaid ………………………………………………… 182 209 -13% TM …………………………………………………………… 98 103 -5% Subscriber Acquisition Cost (SAC) Globe Postpaid . ………………………………………………… 5,382 4,968 8% Prepaid Globe Prepaid ………………………………………………… 37 40 -8% TM …………………………………………………………… 34 34 - Average Monthly Churn Rate (%) Globe Postpaid . ………………………………………………… 1.95% 1.64% Prepaid Globe Prepaid ………………………………………………… 6.75% 5.74% TM …………………………………………………………… 8.35% 6.73% * Prior period figures have been restated to reflect adjustments for mobile broadband and hybrid postpaid plans.

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Globe ended the year with a cumulative mobile subscriber base of 23.2 million, 6% lower than last year’s 24.6 million SIMs. Globe recalibrated its subscriber acquisition efforts beginning in the second quarter to focus on better quality subscribers, while deliberately churning out its marginal users. As a result, full year mobile gross additions were lower by 5% at 19.4 million SIMs from 20.5 million SIMs in 2008. Blended churn rates were also elevated at 7.2% compared to 6.0% last year, resulting in a 1.4 million net reduction in Globe’s SIM base. Subscriber growth resumed in the fourth quarter as Globe closed the period with net additions of about 117,000 SIMs. Fourth quarter gross additions were up 30% compared to the prior quarter while churn rates were lower, with the adjustments in Globe’s acquisition and subscriber retention programs, and the continued clean-up of its SIM base.

The succeeding sections cover the key segments and brands of the mobile business – Globe Postpaid, Globe Prepaid and TM. Globe Postpaid Globe’s postpaid segment comprised about 4% of its total subscriber base. Total postpaid gross and net subscriber additions for the period were 224,354 and 55,673, respectively compared to the 242,587 and 95,125 registered for the same period last year. Cumulative subscribers as of end 2009 grew 7% to more than 851,000 on the back of higher subscriptions particularly from hybrid plans. Postpaid gross and net ARPUs of =P1,822 and =P1,283, were lower than last year’s =P1,967 and =P1,394 on account of lower average voice usage offset by higher take up of SMS and mobile browsing services. Postpaid SAC increased 8% year on year to =P5,382 from =P4,968 due to increased handset subsidies for new postpaid offers, as well as higher advertising and promotion charges. Prepaid Globe’s prepaid segment, which includes the Globe Prepaid and TM brands, comprised 96% of its total subscriber base. A prepaid subscriber is recognized upon the activation and use of a new SIM card. The subscriber is provided with 60 days (first expiry) to utilize the preloaded SMS value. If the subscriber does not reload prepaid credits within the first expiry period, the subscriber retains the use of the mobile number but is only entitled to receive incoming voice calls and text messages for another 120 days (second expiry). The second expiry is 120 days from the date of the first expiry. However, if the subscriber does not reload prepaid credits within the second expiry period, the account is permanently disconnected and considered part of churn. The first expiry periods of reloads vary depending on the denominations, ranging from 3 days to 120 days after activation. The first expiry is reset based on the longest expiry period among current and previous reloads. Under this policy, subscribers are included in the subscriber count until churned. In 2009, the National Telecommunications Commission (NTC) published Memorandum Circular 03-07-2009 which promulgates the extension of the validity periods of prepaid reloads effective July 19, 2009. Under the new pronouncement, the first expiry periods now range from 3 days for =P10 or below to 120 days for reloads amounting to =P300 and above. The second expiry remains at 120 days from the date of the new first expiry periods. The succeeding sections discuss the performance of the Globe Prepaid and TM brands in more detail. Globe Prepaid Globe Prepaid currently accounts for 56% of the total mobile SIM base compared to 54% in 2008. The brand posted a 2% decline in its SIM base and closed the year with 13.0 million SIMs from 13.3 million in

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2008. Gross additions of 10.4 million were 5% higher compared to last year’s 9.9 million. However, higher churn resulting from intense market competition and deliberate churn out of marginal subscribers resulted in net reductions of about 244,000 against last year’s net additions of 1.2 million SIMs. Gross and net ARPUs for Globe Prepaid declined by 14% and 13%, respectively, as revenues continue to be impacted by intense competition, declining yields, and multi-SIM usage. Globe re-launched Globe Tattoo as a convergent brand in 2009 to serve both the internet and telephony needs of today’s digitally-attuned youth. With hip and new SIM card designs, Globe Tattoo SIMs can be used for both mobile phone use, and through the Globe broadband Tattoo USB stick for internet browsing using a laptop. Following the recalibration of its acquisition drives to focus on better-quality subscribers, Globe Prepaid SAC declined 8% year on year from =P40 to =P37. SAC continues to be recoverable within a month’s net ARPU. TM Globe’s mass market brand TM ended the year with 9.3 million subscribers, 11% lower than last year’s 10.6 million SIMs. TM registered gross additions of 8.8 million, down by 16% from last year as Globe scaled back on some of its aggressive SIM pack promotions and recalibrated its sales drives to focus on better quality subscribers. Globe also churned out some of its marginal, lower-quality subscribers, resulting in a net reduction of 1.2 million SIMs in TM’s subscriber base. TM subscribers now comprise 40% of Globe’s cumulative subscriber base compared to 43% in 2008. TM’s net ARPU for 2009 was 5% lower compared to prior year, but showed improvements particularly during the last two quarters of the year. Total TM revenues also grew by 5% year on year despite the 11% contraction in its SIM base. The “Republika ng TM” brand refresh campaign, the distinct positioning of the brand, and the sustained efforts to drive usage through affordable voice and text offerings all contributed to the continued top-line growth of the TM brand. TM’s SAC remained at =P34 and remains recoverable within half a month’s net ARPU. GCash GCash continues to establish its presence in the mobile commerce industry. GCash’s initial thrust towards money-transfers, purchase of goods and services from retail outlets, and sending and receiving domestic and international remittances has spurred alliances in the field of mobile commerce. Today, GCash allows Globe and TM subscribers to pay or transact for the following using their mobile phone:

• domestic and international remittances • utility bills • interest and amortization of loans • insurance premiums • donations to various institutions and organizations • sales commissions and payroll disbursements • school tuition fees • micro tax payments and business registration • electronic loads and pins • online purchases • airline tickets

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In addition to the above transactions, GCash is also used as a wholesale payment facility. Net registered GCash user base at the end of 2009 totaled 1.04 million. To enable further linkages of GCash’s platform and mobile technology with microfinance activities, Globe, the Bank of the Philippine Islands (BPI) and Ayala Corporation (AC) signed a memorandum of agreement in 2008 to form a joint venture that would allow rural and low-income customers’ access to financial products and services beyond remittances. Opportunities include access to deposits and withdrawals, salary and fund disbursements, donations, online purchases and bills payment facilitated by texting. Last October 2009, the Bangko Sentral ng Pilipinas (BSP) approved the sale and transfer by BPI of its shares of stock in Pilipinas Savings Bank, Inc. (PSBI), formalizing the creation of the venture. Globe’s and BPI’s ownership stakes in the company is at 40% each, while AC’s shareholding is at 20%. The partners plan to transform PSBI (now called BPI GLOBE BANKO INC.) into the country’s first mobile microfinance bank. Fixed Line and Broadband Business

For the Year Ended

31-Dec 31-Dec YoY

2009 2008 Change (%)

Service

Fixed line Voice 1 ….………………………………………………… 2,795 3,088 -9%

Fixed line Data 2……………………………………………………… 3,038 2,478 23%

Broadband 3..………………………………………………………… 3,289 1,892 74%

Fixed line and Broadband Net Service Revenues…….... ............... 9,122 7,458 22% 1 Fixed line voice nnet service revenues consist of the following:

a) Monthly service fees including CERA of voice-only subscriptions; b) Revenues from local, international and national long distance calls made by postpaid, prepaid fixed line voice subscribers,

and payphone customers, as well as broadband customers who have subscribed to data packages bundled with a voice service. Revenues are net of prepaid and payphone call card discounts;

c) Revenues from inbound local, international and national long distance calls from other carriers terminating on Globe’s network;

d) Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi-calling, voice mail, duplex and hotline numbers and other value-added features; and

e) Installation charges and other one-time fees associated with the establishment of the service. f) Revenues from DUO service consisting of monthly service fees for postpaid and subscription fees for prepaid Revenues from (a) to (c) are net of any interconnection or settlement payments to domestic and international carriers.

2 Fixed line data net service revenues consist of the following:

a) Monthly service fees from international and domestic leased lines; b) Other wholesale transport services; c) Revenues from value-added services; and d) One-time connection charges associated with the establishment of service.

3 Broadband net service revenues consist of the following:

a) Monthly service fees of wired, fixed mobile, and fully mobile broadband data only and bundled voice and data subscriptions;

b) Browsing revenues from all postpaid and prepaid wired, fixed mobile and fully mobile broadband packages in excess of allocated free browsing minutes and expiration of unused value of prepaid load credits;

c) Value-added services such as games; and Installation charges and other one-time fees associated with the service.

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Fixed Line Voice

Globe Group

For the Year Ended

31 Dec 2009

31 Dec 2008

YoY Change

(%) Cumulative Voice Subscribers – Net (End of period) 1 …………… 589,331 420,270 40% Average Revenue Per Subscriber (ARPU) Gross ARPU…………………………………………………………… 543 699 -22%

Net ARPU……………………………………………………………… 476 613 -22% Average Monthly Churn Rate ..……………………………………… 3.39% 2.21% 1 Includes DUO and SuperDUO subscribers; Prior period figures have been restated for comparability. Cumulative fixed line voice subscribers grew 40% year on year driven mainly by higher subscriptions to bundled voice and broadband plans, as well as the DUO and SUPERDUO service. Despite the expansion in subscriber base, fixed line voice revenues decline of 9% from last year given the higher proportion of bundled voice and data subscriptions compared to stand-alone, voice-only plans (please note that the monthly service fees for bundled services are included in “Broadband”).

During the year, Globe launched the DUO service - an innovative product that combines a mobile and wireless landline service into one handset. For an incremental monthly service fee of =P399 on top of the regular MSF of postpaid plans, DUO subscribers are provided a landline number linked to their current mobile number which they can use to make unlimited calls to any landline within the same area code and to other DUO subscribers. Later in the year, Globe also introduced SUPERDUO, an improvement over the original DUO service to include unlimited mobile-to-mobile calls to any Globe and TM subscriber (refer to mobile section for more details). Fixed Line Data

Globe Group For the Year Ended

Service Revenues (Php Millions)

31 Dec 2009

31 Dec

2008

YoY

Change (%)

Fixed line Data International …..…………………………………………………… 944 719 31% Domestic …… ……………………………………………………… 1,362 1,130 21% Others 1 …………………………………………………………… 732 629 16% Total Fixed line Data Service Revenues………………………………… 3,038 2,478 23% 1 Includes revenues from value-added services such as internet, data centers and bundled services. The fixed line data segment continued to post strong revenue gains, ending the year with =P3.0 billion in revenues, up 23% year on year. Growth has been fueled by the company’s expansion of its network of high-speed data nodes, transmission links, and international bandwidth capacity to serve the requirements of business and enterprise clients, including those in the offshoring and outsourcing industries.

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Broadband

For the Year Ended

31 Dec 31 Dec YoY

2009 2008 Change (%)

Cumulative Broadband Subscribers Wireless 1 ……………………………………………………. 499,383 81,293 514% Wired………………………………………………………….. 216,089 149,675 44% Total (end of period)……………………………………………. 715,472 230 ,968 210%

1 Includes fixed wireless and fully mobile broadband subscribers. Globe’s broadband business sustained strong growth in both revenues and subscribers. Broadband subscribers grew three-fold from 2008 to close the year with more than 715,000 subscribers, exceeding full year guidance of half a million subscribers. The business delivered =P3.3 billion in service revenues in 2009, up a robust 74% from prior year. The broadband segment comprises 5% of consolidated revenues compared to 3% last year. A key contributor to the growth in Globe’s broadband business is its fully mobile broadband service sold under the Globe Broadband Tattoo brand. The brand is targeted towards the fast-growing youth segment, particularly those who require affordable, on-the-go broadband connections. This mobile internet service is available in prepaid and postpaid variants with download speeds of up to 2 Mbps. New postpaid Tattoo plans starting from Plan 799 up to Plan 1499 were launched which include free browsing hours with low per hour charges for usage in excess of the monthly limit. For the prepaid variant, Globe lowered entry costs for the service by reducing the price of its Globe Broadband Tattoo prepaid kit from =P2,500 to =P895. The package comes with a USB modem stick and free =P200 prepaid credit so subscribers can immediately use the service. Tattoo SIMs are also voice, SMS, international roaming and VAS capable. Reloads can be made through the usual prepaid top-up channels including over-the-air reload facility through any of its Globe AutoLoad Max retailers. Globe’s primary fixed wireless broadband offering is based on the WiMax technology, complementing the company’s existing 3G with HSDPA service which is used for mobile, on-the-go broadband. Following its commercial launch in 2008, Globe’s WiMax service is now available in over 190 towns and cities nationwide. The service has gained good traction with customer satisfaction ratings remaining high. Globe’s WiMax service is available in data-only plans at 512kbps and 1mbps for =P795 and =P995 per month, respectively. WiMax bundled voice and data plans are also offered at 512kbps and 1 mbps for =P995 and =P1,295 per month. Wireless subscribers now account for 70% of cumulative broadband subscribers, up from 35% at the end of 2008.

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Other Globe Group Revenues International Long Distance (ILD) Services

Globe Group For the Year Ended

ILD Revenues and Minutes

31 Dec 2009

31 Dec 2008

YoY

Change (%)

Total ILD Revenues (Php Millions) …………………………………………………… 14,317 14,915 -4%

Average Exchange rates for the period (Php to US$1)………………………… 47.777 43.946 9% Total ILD Revenues as a percentage of net service revenues………………… 23% 24% Total ILD Minutes (in million minutes) 1………………………………………… 2,388 2,457 -3%

Inbound…………………………………………………………………………… 2,019 2,131 -5% Outbound.………………………………………………………………………… 369 326 13%

ILD Inbound / Outbound Ratio (x) …………………………………………… 5.47 6.54 1 ILD minutes originating from and terminating to Globe and Innove networks. Both Globe and Innove offer ILD voice services which cover international call services between the Philippines to more than 200 destinations with over 500 roaming partners. Globe’s service generates revenues from both inbound and outbound international call traffic with pricing based on agreed international termination rates for inbound traffic revenues and NTC-approved ILD rates for outbound traffic revenues. On a consolidated basis, ILD voice revenues from the mobile and fixed line businesses decreased by 4% to P=14,317 million compared to last year’s P=14,915 million following a 3% decline in total ILD traffic. While outbound traffic grew 13% year on year, inbound traffic declined, driving the net reduction in ILD minutes. To grow its international service revenues, Globe sustained its popular TipIDD offers, as well as OFW SIM packs. Globe also launched IDD Suki – the first and only IDD load (prepaid credit) that can be purchased from AMAX retailers nationwide. The load is available in =P20 and =P30 denominations and which can be used for calls to popular OFW destinations worldwide. Globe also launched its “Worldwidest” campaign in the last quarter, highlighting the multitude of international services available to its subscribers. This includes promotional call rates to popular OFW destinations worldwide, low calling rates via its TipIDD card, and affordable IDD Suki load credits that can be purchased from its extensive and nationwide AMAX retailer network. To spur additional outbound IDD voice traffic during the holidays, Globe also announced a =P5 per minute calling rate to selected Bridge Mobile operators, using a specific dialing prefix. Globe also extended its affordable iTxt rates to selected operators and lowered rates for international SMS to =P5, from =P15.

Interconnection

Domestically, the Globe Group pays interconnection access charges to other carriers for calls originating from its network terminating to other carriers’ networks, and hauling charges for calls that pass through Globe’s network terminating in another network. Internationally, the Globe Group also incurs payouts for outbound international calls which are based on a negotiated price per minute, and collects termination fees from foreign carriers for calls terminating in its

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network. The Globe Group also collects interconnection access charges from local carriers whose calls and SMS terminate in Globe Group’s network.

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IV. AC Capital

Ayala holds a portfolio of other investments - which include operations in water distribution, electronics and information technology, automotive dealership and international businesses - under an internal development division called AC Capital.

Water Distribution MANILA WATER COMPANY, INC.

Background Manila Water Company, Inc. (“Manila Water” or “MWC”) is a Philippine company which is involved in providing water, sewerage and sanitation services. Manila Water is a concessionaire of the Metropolitan Waterworks and Sewerage System (“MWSS”) since 1997. It currently serves a total estimated population of over 6 million people in the East Zone, which encompasses 23 cities and municipalities, including Makati, Mandaluyong, San Juan, Taguig, Pateros, Marikina, Pasig, most of Quezon City and Rizal Province, as well as some parts of Manila. Under the Concession Agreement (CA) entered into on February 21, 1997 with MWSS, Manila Water was granted exclusive rights to service the East Zone as an agent and contractor of MWSS, to manage, operate, repair, decommission and refurbish the facilities, including the right to bill and collect for water and sewerage services in the East Zone. On October 22, 2009, Manila Water’s application for the 15-year renewal of the CA was acknowledged and approved by the Department of Finance following the special authority granted by the Office of the President. With the CA renewal, the term of the concession was extended for 15 years or from the original 2008-2022 to 2008-2037. Under the said agreement, Manila Water is entitled to recover the operating and capital expenditures, business taxes, concession fee payments and other eligible costs, and to earn a reasonable rate of return on these expenditures for the remaining term of the concession or until 2037. Manila Water has also expanded its services outside of the East Zone of Metro Manila. In July 2008, Manila Water won a contract for leakage reduction in Ho Chi Minh City, Vietnam. Prior to this, Manila Water already has an existing management contract in Tirupur, India. Through new joint venture companies, Manila Water acquired two (2) new concessions outside of the East Zone, namely, Laguna and Boracay. Manila Water’s principal shareholders include Ayala, Mitsubishi Corporation, and the International Finance Corporation (“IFC”). Operations and Performance Over the past 12 years, Manila Water has improved the delivery of basic water services to its customers within the East Zone by upgrading the quality of its network and services to world class standards. With these efforts, Manila Water managed to maintain and further improve its service level to its existing customers despite its aggressive expansion. As a result, Manila Water got an overall 100% “Very Good” rating from the customer’s evaluation in the Public Assessment of Water Services (PAWS) survey conducted by the MWSS Regulatory Office. Another significant accomplishment for the year was the reduction in its level of system losses, as measured by its non-revenue water ratio (“NRW”). NRW was further reduced by 3.8 percentage points to 15.8% by the end of 2009, from 19.6% in 2008. This was attained largely through more efficient

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management of the network flows and pressure, as the water saved from the NRW reduction efforts was re-channeled towards the expansion areas in the Rizal province. At this current NRW level, Manila Water compares favorably with the water systems of its regional counterparts. Manila Water’s operational performance displayed positive results as water sales volume registered slight improvement despite the challenges brought about by the global economic slowdown and the impact of the recent calamities. The volume of water sales for the year reached 396 million cubic meters (“mcm”), an increase of 2% or 8 mcm as compared to last year’s level of 387 mcm. The increase was brought about by new service connections that reached 52,410 for 2009, which largely came from the expansion areas in the Rizal towns. Manila Water served a total of 1,086,296 households through 736,305 water service connections as of December 31, 2009, as compared to last year’s level of 1,031,895 households and 683,894 water service connections. With respect to water availability, approximately 99% of Manila Water’s customers, who are currently connected to the network, enjoy 24-hour water availability at a level of quality that exceeds the national standards for water quality. Manila Water has consistently complied with the Philippine National Standards for Drinking Water (“PNSDW”), and thus, has provided potable drinking water to its customers. Through the company’s ISO accredited laboratory together with its technical capability, Manila Water has consistently delivered valid test results acceptable to regulating offices such as the Department of Health. As part of the 2008 Rate Rebasing and CA renewal commitment with MWSS, Manila Water focused on the implementation of its wastewater master plan which increased sewer coverage within the East Zone. This entailed the construction of various sewerage and septage treatment facilities and the laying of new separate and combined drainage sewer lines. The total number of sewer connections increased to 50,800 in 2009. Sanitation services were also intensified which resulted in a total of 65,355 septic tanks desludged and benefited 291,469 households. In addition, Manila Water has remained 100% compliant with regulatory standards and parameters for wastewater effluent. Manila Water’s capital expenditures commitment for the year 2009 includes the implementation of major water system projects involving construction of facilities such as treatment plants, pumping stations, reservoirs and transmission pipelines. As a result, capital expenditures and concession fee payments for 2009 reached =P5.3 billion. Aside from its wastewater expansion, the other capital investment projects were geared towards improving water services, ensuring the reliability of water supply, reducing water losses, maintaining water quality, implementing sustainable development programs and expansion projects in growth areas, in the Taguig and Rizal province. Significant developments were also realized in Manila Water’s key projects outside the East Zone. During the year, Manila Water was able to acquire concessions for two new businesses, Laguna Water Company (“LWC”) and Boracay Island Water Corporation (“BIWC”). LWC, a joint venture company with the Provincial Government of Laguna, has a 25-year water service concession for the municipalities of Cabuyao, Biñan and the City of Sta. Rosa. On the other hand, BIWC, a joint venture company between Philippine Tourism Authority, has a 25-year water and wastewater service concession for Boracay Island. Tariff Structure and Rate Regulation MWC is entitled to recover over the Concession period its operating, capital maintenance and investment expenditures, business taxes and Concession Fee payments, and to earn a rate of return on these expenditures for the remaining term of the concession. The rate of return is then adjusted during the Rate Rebasing exercise, which is conducted every five (5) years. This return is market-based and may change after each Rate Rebasing exercise.

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During the exercise, MWC submits a business plan including all its investment and expenditures requirements in the concession area to the MWSS Regulatory Office for evaluation and approval. Taking into consideration some agreed assumptions, the regulator then determines the appropriate return and the tariffs required for MWC to recover all its investments plus the guaranteed return over the remaining life of the concession. Prior to the implementation, the approved business plan and corresponding tariff hikes will be subjected to public consultations. In December 2007, the second Rate Rebasing exercise was completed. MWC’s current real rate of return, which will be applicable for all investments made by MWC for the East Zone within the period starting January 1, 2008 up to December 31, 2012, was pegged at 9.3%. Different water tariff schedules apply to different categories of customers. In addition, higher consumption levels result in a higher water rate on a per cubic meter basis. Adjustments to the water tariff, mostly in the form of the Basic Water Charge, are implemented on January 1 of the year following each Rate Rebasing exercise. These rates are further broken down to cover the different customer types and consumption brackets. After the recently completed Rate Rebasing exercise, Manila Water was granted a onetime tariff rate which will be implemented on a staggered basis over a period of 5 years. The rate adjustment will cover for MWC’s =P187-billion capital investment and operational expenditure program to be implemented in the next 15 years. With the recent approval of the Concession Agreement Renewal, Manila Water’s committed Regulatory Office approved a tariff increase of =P1 per year effective 2010 until 2016. Aside from the determination of the Basic Water Charge, water tariffs are also adjusted annually to account for inflation (as measured by the Philippine Consumer Price Index (“CPI”)). In addition, certain events beyond the control of Manila Water are considered and an extraordinary price adjustment is implemented to cover factors such as El Nino occurrence and other unforeseen calamities. The Concession Agreement also allows MWC to recover through tariff adjustments all past foreign exchange losses and at the same time adopt a foreign currency differential adjustment (“FCDA”) for estimated foreign exchange gains or losses for the year. These gains and losses are in relation to impact of foreign currency fluctuations on the foreign denominated loans and Concession Fee payments to MWSS. The FCDA is evaluated quarterly, the latest of which was implemented on January 2010. Corporate Governance Manila Water continues to take steps to strengthen its corporate governance practices. To illustrate the high priority put on corporate governance, the Audit and Governance Committee of MWC’s Board of Directors ensures the adoption of policies on transparency and disclosures. At the same time, Manila Water has continually sought ways to improve internal controls and has instituted the integration of risk planning and management in its planning and budgeting process. As Manila Water continues to expand its services within and outside of its existing concession area, Manila Water saw a need to create a Risk Management Department (RMD) to be in charge of identifying major risks in Manila Water’s business operations and development projects. Manila Water launched the Enterprise Risk Management (ERM) Project which will take the existing risk management process to a higher level and develop a common risk language and framework that is easily understandable. It aligns the Manila Water’s strategy, processes, people, technology and knowledge and manages its identified top risks to ensure attainment of its business objectives. Manila Water aims to make ERM a way of life where managing risks becomes the responsibility of every individual in the organization with end view of increasing shareholder value and enhancing the existing risk management programs of Manila Water. A The Chief Risk Officer (CRO) was appointed to head the RMD and champion the ERM Framework across the entire organization.

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In the past, Corporate Governance Asia and Asiamoney and the Institute of Corporate Directors have recognized MWC with various awards on corporate governance. Sustainable Development Manila Water takes pride in the fact that it embodies what genuine corporate social responsibility (CSR) is – that social and environmental objectives are perfectly aligned with business goals and integrated in Manila Water’s day-to-day operations. As such, it is recognized as one of the CSR leaders and pioneers in the Philippines. Water Supply Provision to the Urban Poor Manila Water sees it important to make potable water available to everyone, especially the urban poor, as it is a basic human need. The ‘Tubig Para Sa Barangay’ (“TPSB”) or Water for the Community program was set up in 1998 to help build communities by way of improving the quality of their life. Through the TPSB program, more than 1.6 million people now enjoy 24-hour supply of clean, safe-to-drink and affordable water, as well as improved overall health and sanitation conditions. Manila Water also undertakes ‘Lingap’ programs to improve water supply and sanitation facilities in public service institutions such as schools, hospitals, city jails, markets and orphanages which largely serve poor families. Manila Water has rehabilitated the water reticulation system and installed wash facilities and drinking fountains in over 300 institutions. Water Education Manila Water’s ‘Lakbayan’ or Water Trail program aims to promote stakeholder awareness on the value of water and the need for wise use of water and proper wastewater management. For better understanding and deeper appreciation of the intricacies of treating and delivering potable water supply and wastewater services, stakeholders are exposed to the entire water cycle – from the raw water source, the treatment process, distribution, up to wastewater treatment process. To date, more than 400 groups and 15,000 individuals from communities, local and national government offices, schools, non-government organizations, private companies and other special groups have participated in the ‘Lakbayan’ program. Environmental Protection Manila Water has taken a more active stance in protecting the environment. In fact, Manila Water has embedded important environmental initiatives in every level of the water supply cycle to ensure sustainability and reliability of services to customers. After ratifying a formal Climate Change Policy in late 2007, Manila Water began quantifying its baseline carbon footprint and monitoring its impact on the environment. From the calculated figures, Manila Water set carbon footprint reduction targets. Manila Water also intensified its sewerage programs by laying sewer lines that link to the existing municipal drainage network and treating the collected sewage through the constructed treatment plants before discharging to Metro Manila’s major river systems. Awards Manila Water’s accomplishments in the field of sustainable development have been affirmed several times. In 2007, IFC conferred to MWC its annual Client Leadership Award in recognition of MWC’s comprehensive approach in promoting sustainable development in the East Zone of Metro Manila and in

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the water and wastewater industry. In 2008, Manila Water was recognized as one of the top ten Greenest Companies in Asia by Finance Asia. Recently, Manila Water has once again proven that it is one of the most respected CSR practitioners in the region after winning the Intel – Asian Institute of Management (AIM) Corporate Responsibility Award (IACRA) at the 2009 Asian Forum on Corporate Social Responsibility (AFCSR). Expansion and Investment Programs From 2008 to 2012, MWC expects to spend =P36.6 billion on capital expenditures and Concession Fee payments. MWC’s investment program plans to continue to develop new water sources, rehabilitate and expand its water distribution network, improve existing facilities and ensure its reliability, expand sanitation services and adopt a low-cost decentralized sewerage strategy. In addition, Manila Water is now seeking new growth opportunities outside of the East Zone concession area. To this end MWC is forming two subsidiaries to propel its foray into the international and local water and environmental sectors. Water Network Expansion Over the next five years, Manila Water will be connecting an additional 1 million people to its customer base through the expansion of its water network to reach more areas and improve service levels in Rizal Province such as San Mateo, Angono and Taytay. The network expansion will involve the laying of new primary and distribution mains, pumping stations and reservoirs. New Water Sources Complementing the expansion programs would be the development of new water sources to ensure the continuity and reliability of water supply in MWC’s concession area. Network Reliability Manila Water will also be carrying out measures to further improve the reliability of the water network against natural calamities like earthquakes through the laying of additional pipelines, retrofitting of critical mains, and construction of reservoirs at strategic locations. Wastewater Expansion A major part of the expansion program of Manila Water is on wastewater. MWC will increase the current coverage of 12% level to 30% in 2010. Included in the approved rate rebasing plan is the construction of more sewerage and septage treatment plants and expand sewer network possibly through a combine sewer-drainage system. It will also improve existing facilities, and implement more stringent safety elements. The new tariff adjustment already considered the proposed capital investments in wastewater. The Marikina River Project will be one of the major wastewater initiatives of MWC. This will entail clean-up of the river through the development of several treatment plants along the riverbanks, to be able to treat collected wastewater before being discharged to the river. New Business Development To support its growth strategy, MWC is also pursuing local and regional new business opportunities. Just recently, Manila Water was awarded a US$ 15 million contract in Ho Chi Minh City, Vietnam. MWC bested 4 other foreign companies in this 5 year Performance-Based Leakage Reduction and Management Services to Saigon Water Corporation (SAWACO). MWC currently has an ongoing

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operations and management contract in Tirupur, India, and is providing consultancy services for the water and wastewater operations in Boracay Island. Dividend Policy Under Manila Water’s cash dividend policy, common shares shall be entitled to annual cash dividends equivalent to 35% of the prior year’s net income, payable semi-annually. Any change in Manila Water’s Cash dividend policy is always subject to Board of Directors’ approval. In addition, Manila Water’s Board of Directors is also authorized to declare cash dividends. A cash dividend declaration does not require any further approval from the stockholders. A stock dividend declaration, however, requires further approval of stockholders representing not less than two-thirds of Manila Water’s outstanding capital stock. Financial Highlights for the Year 2009 Manila Water’s solid operational performance resulted in favorable results during the year. It posted a net income attributable to equity holders of MWC of =P3,231 million for 2009, a 16% improvement compared to =P2,788 million last year. The figure was also higher than plan for the year, as a result of lower effective income tax rates and lower depreciation expense resulting from the approval of the CA renewal. The aforementioned factors, together with the effective management of operating costs, sustained its net income growth. Total revenues for the year ended December 31, 2009 increased by =P619 million or 7% to =P9,533 million from =P8,913 million in 2008. The increase in revenues is due to the 2% growth in water sales volume and the CPI increase in tariff implemented beginning February 2009. Core revenues (composed of water, environmental and sewer revenues) amounted to =P9,442 million, 7% higher than the 2008 level. Manila Water registered around =P24 million of revenues from its business outside of the East Zone, coming largely from its venture in Ho Chi Minh City, Vietnam. For the first time, Manila Water recognized around =P20 million as its share in the water revenue from its Laguna venture. Total cost and expenses (before depreciation and amortization) amounted to =P2,730 million in 2009, compared to =P2,505 million in 2008. As a result of various cost management programs, Manila Water realized significant savings in manpower, power and maintenance costs, effectively increasing its overall cost efficiency. These initiatives include the rehabilitation of Manila Water’s existing facilities, construction of new reservoirs, the laying of new pipes and application of new systems, processes and technologies. As a result, increase in operating cost was managed despite the expansion in water and wastewater services. Earnings before interests, taxes, depreciation and amortization (“EBITDA”) was recorded at =P6,803 million in 2009, 6% higher than the 2008 level while EBITDA margin10 was maintained at 71% as a result of cost efficiency gains. Interest income amounted to =P362 million in 2009, coming from investments in money market instruments. Interest expenses amounted to =P812 million in 2009, 18% higher than the previous year’s levels, given the full year impact of the =P4.0 billion bonds issued in late 2008. Total assets as of December 31, 2009 grew by =P7,390 million to =P43,758 million from the December 2008 level of =P36,368 million. Growth in total assets was driven by the capital investments which focused on water and wastewater expansion and the capitalization of additional regulatory cost as a result of the CA renewal. Collection efficiency averaged 100% and accounts receivable days improved to 18 days. The improved collection performance was a result of Manila Water’s aggressive collection strategies, alongside the initiative to make bill payments more convenient to customers.

10 EBITDA divided by total revenue

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By the end of 2009, total cash reserves (including short term cash investments and investments in marketable securities held as available-for-sale financial assets) amounted to =P9,729 million. This was the result of improved collection efficiency and =P2.1 billion proceeds from loan drawdown. This cash balance is intended to finance Manila Water’s =P10 billion capital investments in 2010. Current ratio for 2009 was computed at 1.69 times. Long-term debt in 2009 increased to =P14,361 million. This includes the =P4.0 billion peso bond and additional availments from loan facilities. As of end of 2009, around 47% of the Manila Water’s total long term debts were denominated in Philippine currency, while the rest were denominated in either US dollars or Japanese yen. Approximately 70% of Manila Water’s direct borrowings were fixed rate loans. Net bank debt-to-equity ratio was computed at 0.27 times. As of December 31, 2009, net cashflows from operating activities totaled =P5,850 million. A total of =P5,331 million was used to finance Manila Water’s capital investments and concession obligations. A total of =P2,140 million in loan proceeds were received in 2009, while Manila Water also paid =P720 million in maturing loan amortizations and interest payments. Manila Water also declared cash dividends amounting to =P969 million, 9% higher than the prior year’s cash dividend payments.

2009 2008 FINANCIAL HIGHLIGHTS (in million Pesos) Operating Revenues 9,533 8,914 Operating Costs & Expenses* 2,730 2,505 EBITDA 6,803 6,408 Net Income attributable to equity holders of MWC 3,231 2,788 OPERATIONAL HIGHLIGHTS Billed water volume (in million cu.m.) 396 387 NRW (%) 15.8 19.7

Households served (in thousands) 1,086 1,032 *Costs and expenses excluding depreciation and amortization

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Electronics and Information Technology Ayala is involved in electronics and information technology through Integrated Micro-Electronics, Inc. (“IMI”) and Azalea Technology. As of December 31, 2009, IMI’s major shareholders were Ayala through its wholly owned subsidiary AYC Holdings Ltd. and Resins Inc.. Azalea Technology, which is wholly owned by Ayala, was established in January 2000 to be a holding company for Ayala’s technology related investments. INTEGRATED MICROELECTRONICS, INC. BACKGROUND Established in 1980, IMI has progressed into a company offering core manufacturing capabilities as well as higher value competencies in design, engineering, prototyping, and supply chain management. IMI is a vertically integrated electronics manufacturing services (EMS) provider to leading global original equipment manufacturers (OEMs) in the computing, communications, consumer, automotive, industrial, and medical electronics markets. In January 2010, IMI completed its listing by way of introduction of One Billion Two Hundred Sixty Eight Million Four Hundred Ninety Seven Thousand Two Hundred Fifty Two (1,268,497,252) common shares with a par value of =P1.00 per share or an aggregate amount of One Billion Two Hundred Sixty Eight Million Four Hundred Ninety Seven Thousand Two Hundred Fifty Two Pesos (=P1,268,497,252) (the Subject Shares). The Subject Shares were listed by way of introduction with the PSE under Section 1(e) of Part H of Article III of the Revised Listing Rules. The opening price (“Opening Price”) of the shares was =P6.20 per share which was based on IMI’s September 30, 2009 book value per share of US$0.130 at the BSP’s reference rate of USD/Php exchange rate of =P47.63. IMI is a stock corporation organized under the laws of the Republic of the Philippines and registered with the Philippine Securities and Exchange Commission on 08 August 1980. IMI proved that a Filipino-owned company can go global, transforming its local operations into a global network. IMI has three (3) wholly-owned subsidiaries, namely: IMI International (Singapore) Pte. Ltd. (“IMI Singapore”), IMI USA, Inc. (“IMI USA”) and IMI Japan, Inc. (“IMI Japan”). IMI Singapore was incorporated and domiciled in Singapore having a wholly-owned subsidiary incorporated and domiciled also in Singapore, Speedy-Tech Electronics Ltd. (STEL). STEL on its own has subsidiaries located in Hong Kong, China, Singapore and Philippines. IMI Singapore is engaged in the procurement of raw materials, supplies and provision of customer services while STEL and its subsidiaries are principally engaged in the provision of Electronics Manufacturing Services and Power Electronics solutions to OEM customers in the consumer electronics, computer peripherals/IT, industrial equipment, telecommunications and medical device sectors. IMI USA acts as direct support to IMI’s customers by providing Program Management, Customer Service, Engineering Development and prototype manufacturing services to both North American and European customers, especially for processes using direct die attach to various electronics substrates. It specializes in prototyping low to medium PCBA and sub-assembly and is at the forefront of technology with regard to precision assembly capabilities including, but not limited to, Surface Mount Technology (SMT), Chip on Flex (COF), Chip on Board (COB) and Flip Chip on Flex. IMI USA is also engaged in engineering, design for manufacturing (DFM) technology, advanced manufacturing process development, new product introduction (NPI), direct chip attach and small precision assemblies. IMI Japan was established to attract more Japanese OEMs to outsource product development to IMI. IMI Japan was registered and is domiciled in Japan to serve as IMI’s front-end design and product development and sales support center.

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Upon its incorporation in 1980, IMI registered its operations with the Board of Investment (BOI). As such, IMI is qualified for fiscal and non-fiscal incentives provided by Executive Order 226 as amended. In 1994, IMI relocated its manufacturing operations in the Laguna Technopark Special Economic Zone in Biñan, Laguna. Upon its transfer, IMI sought registration with Export Processing Zone Authority (EPZA now known as PEZA). On September 12, 1994, through Board Resolution No. 94-177, EPZA approved IMI’s application for registration. At that time, IMI’s registered activity was to manufacture thin film head and gimbal assembly for hard disk drive. Through the years, IMI increased its operations at the Laguna Technopark facilities and has registered more projects and activities with PEZA, all related to production and manufacture of any and all types of electronic products, and in providing services related thereto. These registrations, entitle IMI to certain incentives, which include but are not limited to a four-year income tax holiday (ITH) and an option to apply for ITH extension for a maximum of three (3) years subject to various PEZA requirements wherein projects and activities are qualified and tax and duty free importation of inventories and capital equipment. Upon the expiration of the ITH on these projects and activities, IMI will be subject to a five percent (5%) final tax on gross income earned after certain allowable deductions provided under Republic Act (R.A.) No. 7916 (otherwise known as the “Special Economic Zone Act of 1995”) in lieu of payment of national and local taxes. Fundamental to IMI’s performance excellence is the integration of a Total Quality Management system in its business processes. IMI has various international standard certifications for its Philippine sites – ISO 9001 Quality Management Systems; ISO 14001 Environmental Management Systems; OHSAS 18001 Occupational Health and Safety Assessment Series; ISO/TS 16949 Quality Management Systems for Automotive production; ISO 13485 Quality Management Systems for medical devices; and a newly acquired accreditation for the General Competence of its Calibration Laboratory, ISO 17025:2005 version. SUBSIDIARIES The following are subsidiaries of IMI, none of which is listed in any stock exchanges:

IMI Subsidiaries % of Ownership

Place of Incorporation

1. IMI USA, Inc. 100.00 USA 2. IMI Japan, Inc. 100.00 Japan 3. IMI International (Singapore) Pte. Ltd. 100.00 Singapore

Speedy-Tech Electronics Ltd. and Subsidiaries (“STEL and Subsidiaries’)

100.00 Singapore

Speedy-Tech Technologies Pte. Ltd. 100.00 Singapore Speedy-Tech Electronics (HK) Limited 100.00 Hong Kong Speedy-Tech (Philippines), Inc. 100.00 Philippines Shenzhen Speedy-Tech

Electronics Co., Ltd. 99.443 China

Speedy-Tech Electronics, Inc. (Dormant) 100.00 USA Speedy-Tech Electronics

(Jiaxing) Co., Ltd. 100.00 China

Speedy-Tech Electronics (Chong Qing) Co. Ltd.

100.00 China

LOCATION AND PROPERTIES IMI has production facilities in the Philippines (Laguna and Cavite), China (Shenzhen, Jiaxing, and Chongqing), and Singapore. It also has a prototyping and NPI facility located in Tustin, California.

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Engineering and design centers, on the other hand, are located in the Philippines, Singapore, China, United States, and Japan. IMI’s logistics bases are located in Asia, including China, Singapore, Hong Kong, and Philippines. Also, IMI’s global network of sales agents and representatives are managed by its sales offices in Germany, United States, Japan, Philippines, Singapore and China. IMI does not own land. As a result, it leases the land on which its manufacturing plants, office buildings and sales offices are located. The head office and main plant of IMI are located at North Science Avenue, Laguna Technopark, Biñan, Laguna, 4024 Philippines. The premises are leased from Technopark Land, Inc. On December 23, 2008, IMI renewed the lease for 3 years, to expire on December 31, 2011 and renewable at the option of the parties for such number of years agreed upon by them. IMI is liable to pay a monthly rent specified in the lease contract, exclusive of value added tax, which increases over the years. In the event of sale, transfer or disposition of the leased premises, the lessor shall ensure that the lease will be honored by the buyer. IMI’s subsidiaries, except for IMI-USA, IMI-Japan and Speedy-Tech Electronics (HK) Limited in Hong Kong, lease the land on which their respective manufacturing and office buildings are located. OPERATIONS Design and Engineering Services Partnering with IMI allows a complete and successful product development. This is made possible by IMI’s capability to design and develop complete products and subsystems, analyze product design and materials for costs reduction through value and profit engineering, and develop solutions for cost-effective production and fast time-to-market while safeguarding intellectual property. IMI’s product development and engineering service offerings include Custom Design Manufacturing (CDM) Solutions, Advanced Manufacturing Technology (AMT) Services, Engineering and Test Development, and Reliability/Failure Analysis and Calibration Quality Test solutions. Manufacturing Solutions IMI’s comprehensive manufacturing experience allows a prospective client to leverage its strength in RoHS-compliant and cleanroom manufacturing process, complex manufacturing using consigned equipment and materials, complete turnkey manufacturing with multiple materials sourcing sites, ERP-based planning, purchasing, and manufacturing process, and strategic partnerships with leading materials distributors and manufacturers. IMI has the essential infrastructure equipment, manpower and quality systems to assure quick start of operations and turnaround time. These include: materials management, PCBA and FCPA Assembly, Automated Through-Hole Assembly, Complete Box build Solutions, Sub Assembly services, Component Assembly and Manufacture of Enclosure Systems. Business Models IMI recognizes the uniqueness of each customer’s requirements. To satisfy specific requests, IMI offers flexible business models that allow it to build the perfect assembly for its client’s manufacturing requirements. The “Standard” and “Semi-custom” business models pertain to IMI’s Printed Circuit Board Assembly (PCBA) processes. IMI invests in Surface Mount Technology (SMT) lines which support multiple customer requirements. Back-end and box build processes are also set-up depending on customer requirements. The “Custom” Business Model gives the client a free hand in designing the systems by offering a dedicated facility manned by an independent and exclusive organization that will build the system from ground up. With quality structures and operational procedures compatible with the client’s systems, IMI’s

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line serves as the client’s extension plant, assuring that all the parts and processes are customized to the client’s particular needs. Capabilities and Solutions IMI’s capabilities allow it to take on the specific outsourcing needs of its customers, providing them with flexible solutions that encompass design, manufacturing, and order fulfilment. It develops platforms to customize solutions in response to its customers’ unique requirements. Its platforms in areas like short-range wireless systems, embedded systems, and sensors and imaging technology represent capabilities to manufacture products. New manufacturing capabilities are developed by IMI’s Advanced Manufacturing Engineering (AME) group. Its expertise includes immersion silver process, pre-flow underfill process, thermally enhanced flip chip technology, traceless flip chip technology, and flip chip on flex assembly, among others. IMI has a complete range of manufacturing solutions-- from printed circuit board assembly to complete box build. Through its flexible, efficient, and cost–effective end-to-end EMS solutions, IMI gives OEMs the luxury of focusing on their core competencies of technology R&D and brand marketing. INTELLECTUAL PROPERTY The table below summarizes the intellectual properties registered with the United States Patent and Trademark Office out of the Company’s California and Singapore facilities, competency centers for Advanced Manufacturing Technology: Name Filing Date Expiration Anisotropic Bonding System and Method Using Dynamic Feedback 27 November 2000 26 November 2020 Traceless Flip Chip assembly and method 26 February 2001 25 February 2021 Manufacturing Method for Attaching Components to a Substrate 05 March 2001 04 March 2021 Passive circuitry for harmonic current regulation in a power supply by energy efficient input current shaping 16 September 2001 17 September 2020 COMPETITION IMI is an electronics manufacturing services (EMS) provider to original equipment manufacturers (OEMs) in the computing, communications, consumer, automotive, industrial, and medical electronics segments. The global financial crisis badly hit the electronics industry across the globe. The electronics end-markets generally experienced weak demand as corporate and individual consumers reined in spending. This weak end-market demand coupled with a tight credit situation strained the production of OEMs. Consequently, the EMS industry experienced lower volume requirements from the OEMs. The EMS revenue is expected to increase by 4 percent in 2010. First of all, the end-market electronics demand has generally bottomed out by the end of the second quarter of 2009. Second, there is no question that the economy of the future will be driven by electronics. Third, OEMs still do in-house more than 60 percent of electronics assembly operations. IMI competes worldwide, with focus on Asia (including Japan and China), North America, and Europe. There are two methods of competition: a) price competitiveness, b) robustness of total solution (service, price, quality, special capabilities or technology). IMI competes with EMS companies and original design manufacturers (ODMs) all over the world. Some of its fierce EMS provider competitors include Hon Hai, Flextronics, Kimball, and Hana.

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Hon Hai is a Taiwanese company with annual revenues of US$62 billion; its cost structure is very competitive because it is vertically integrated. Flextronics is a Singapore-headquartered company with annual revenues of US$33 billion; its cost structure is very competitive it is vertically integrated. Kimball is a US company with annual revenues of US$722 million; it is a leading EMS player in the automotive field. Hana is a Thai company with annual revenues of US$303 million; it has a semiconductor manufacturing arm. IMI is focused on delivering customized solutions of highest quality at reasonable prices. It collaborates with the customers in finding the right solutions to their problems. IMI even challenges its own systems and processes if needed. It has a distinct advantage in serving customers who value quality over price and require complex non-standard solutions. Living up to the flexible expertise brand, IMI is adaptable to the needs and conditions of its customers. This expertise has propelled IMI onto the current list of the top 50 EMS providers in the world and earned for IMI several accolades from its customers. RESEARCH AND DEVELOPMENT ACTIVITIES IMI designs and develops complete products and subsystems to assist original equipment manufacturers in product realization. IMI’s design and development capabilities encompass short-range wireless technologies, embedded systems, and power electronics. It engineers work in close coordination with customers during the early stages of product development to ensure a seamless transition from design conceptualization to volume manufacturing. In addition, IMI USA (acquired from Tustin) is home to IMI’s advanced manufacturing technology R&D activities, with focus on areas including flip chip, substrate and interconnect technologies. ENVIRONMENTAL COMPLIANCE IMI complies with ISO 14001, international standard for Environment Management Systems as certified by SGS since year 2000. Moreover, IMI has converted some of its SMT lines to RoHS (Restriction on Hazardous Substances) compliant lines. This environmental compliance enables IMI to qualify as a contract manufacturer for various OEMs. IMI DIVIDEND POLICY

1) A cash dividend of thirty percent (30%) shall be declared and annually paid from previous year

earnings to all stockholders. The target dividend rate should be increased if the earnings appear clearly sustainable and relatively permanent.

2) Dividend shall not be paid from capital. 3) The preferred share dividend shall take precedent over the distribution of dividends for common

shares. 4) All cash dividend declaration to stockholders as of record date shall be approved by the Board of

Directors. 5) Dividend payment shall be made after the annual stockholders meeting or at year-end. IMI FINANCIAL HIGHLIGHTS FOR THE YEAR 2009 IMI posted a turnaround with US$10 million in net income attributable to equity holders of IMI after tax in 2009, a reversal of the net loss incurred in the previous year due to a gradual increase in revenues starting in the second half of 2009 and effective cost management. The year 2009 was a very challenging one for the entire electronics industry. The effects of the global economic downturn on the market, which began in the second half of 2008, ensued in 2009. The electronics manufacturing services (EMS) industry contracted in 2009. In addition to reduced volume requirements of the original equipment manufacturers (OEMs), the EMS industry was besieged by a

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severe supply shortage of electronics components, as suppliers were cautious of excess inventory brought about by the market’s uncertain outlook and the tight credit situation. With the electronics sector under severe stress in 2009, IMI’s revenues for the year declined by 10 percent from 2008 to US$395.5 million. It was only in the second half of the year that the industry environment began to improve, with market trends either bottoming out or posting growth, albeit at a slower pace. IMI’s revenues rebounded accordingly which, coupled with effective cost control and operational streamlining measures, resulted in IMI achieving a net income attributable to equity holders of IMI after tax of US$10 million.

IMI’s net income attributable to equity holders of IMI after tax rose by 160% year-on-year. The increase can be attributed to several factors:

• Sales rebounded in the third quarter of the year due to an improved operating environment. This improved production capacity utilization.

• Operations in the Philippines, particularly in the Cebu and Laguna LIIP plants, were consolidated into Laguna LTI.

• Effective cost reduction measures were implemented which greatly reduced general and administrative expenses.

• IMI obtained additional non-recurring income from recovery of insurance losses.

IMI continued to maintain a solid financial position securing comfortable liquidity and debt levels. Cash generation from operations stayed robust resulting in a consolidated cash balance of US$53.9M at the end of 2009 about same level as in the previous year despite making US$22.8M in bank debt repayments. IMI is still at a zero net debt position with the ending cash level sufficient to cover bank debt balance of US$48.3M. Current ratio stood better at 1.89:1 from 1.70 as at end of 2008. Debt-to-equity ratio likewise improved to 0.29:1 from 0.45 of the previous year. The China and Singapore operations of IMI contributed 51 percent to total IMI revenues in 2009. The main revenue contributor was the increase in volume for a leading Chinese OEM in telecommunications driven by the 3G network deployments in emerging markets. In the Philippines, IMI remained strong in the storage device, automotive, and consumer electronics markets.

The following market trends are expected to positively impact IMI’s performance in 2010. • Global PC shipments are expected to grow in 2010 with the notebook sector as one of the drivers.

Global mobile phone sales are expected to rise this year on the back of expansion in emerging markets. These trends could have a positive effect on IMI’s business in the storage device and telecommunication network infrastructure device sectors.

• The automotive electronics systems are likewise expected to grow steadily between 2010 and 2017. IMI is identifying lucrative product niches that will grow its business in this segment.

OEMs will increasingly look to supplying China. As OEMs need more capacity in China to supply a domestic market that continues to grow at a healthy rate, IMI can aggressively offer its China facilities that are capable of both low-volume high-mix and high-volume low-mix production.

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AZALEA TECHNOLOGY INVESTMENTS, INC. AND AZALEA INTE RNATIONAL VENTURE PARTNERS, LTD. Ayala’s wholly owned subsidiary, Azalea Technology Investments, Inc. (“Azalea Technology”), was established in January 2000 to be a holding company for Ayala’s technology-related investments. Azalea Technology is an investor in technology-related companies in the Philippines. Azalea Technology’s focus is to identify good opportunities in technology-driven businesses and to invest and nurture those businesses. For the year ended December 31, 2009, Azalea Technology generated a net loss of =P28 million, =P35 million of which was Azalea Technology’s equity share in net losses of Ayala Systems Technology, Inc. (“ASTI”). ASTI is a systems integrator and IT services provider to the domestic and international markets. As a systems integrator, it combines its skills in supporting different products and platforms with its experience in managing large projects. As an IT services provider, ASTI offers a wide range of products and services such as hardware, network and communications infrastructure, software tools, business software applications, applications software design, development and quality assurance, project management and business process outsourcing. For the year ended December 31, 2009, ASTI’s revenues were =P305 million with net loss of =P67 million which included =P38 million provision for doubtful accounts and decline in value of an investment. In October 2009, Azalea Technology sold part of its investment in ASTI to SCS Computer Systems Pte. Ltd. diluting Azalea Technology’s interest in ASTI from 58.72% to 49.00%. Azalea Technology has a Game Development Division which focuses on developing mobile services available on mobile telephone companies both in the Philippines and overseas. The division was spun off in early 2006 as Glyph Studios, Inc. and was incorporated as a wholly-owned subsidiary of Azalea International. In August 2009, ownership of Glyph Studios was transferred to Azalea Technology. Azalea International was previously a wholly-owned subsidiary of Azalea Technology. In 2008, Ayala converted its deposits on future subscriptions in Azalea International into equity, increasing Ayala’s direct ownership from 68.71% to 97.78%. Consequently, Azalea Technology’s ownership in Azalea International was diluted from 31.29% to 2.22%. Azalea International has made several key investments in companies based inside and outside the Philippines. Azalea International holds 100% of LiveIt Investments, Ltd. (“LiveIt Investments”), the company that carries Ayala’s businesses in the BPO sector. It also wholly owned HRMall, another BPO company from December 2007 until it was transferred to LiveIt Investments in November 2009. Azalea International continues to invest in technology companies through venture capital funds, Narra Venture Capital LP (“Narra I”) and Narra Venture Capital II LP (“Narra II”) and Tech Ventures III, L. P. (“TV-III”). Narra I is a joint undertaking by Azalea and Tallwood Partners LLC, a leading investor in emerging technologies based in Silicon Valley. Narra I and Narra II have made several investments in companies developing semiconductors and semiconductor-related products, converged communication systems, computing platforms, and software and related services. Azalea International recently invested in Pacific Synergies IV LP. TV-III and Pacific Synergies are both managed by the ICCP Group. Azalea International also has invested in The Rohatyn Group Special Opportunity Fund and General Opportunity Fund. In January 2007, Azalea International bought a minority stake in Milestone, a software

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company based in Australia. For the year ended December 31, 2009, Azalea International generated a net loss of =P650 million. Excluding LiveIt Investments and its subsidiaries, the net loss of Azalea International was =P84 million. =P121 million of the loss pertains to Azalea International’s equity share in net losses of Narra but partially offset by the equity share in net earnings of Milestone amounting to =P28 million.

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Business Process Outsourcing LiveIt Investments Limited (“LiveIt”) is a wholly-owned subsidiary of Azalea International. Incorporated in the British Virgin Islands in June 2006, LiveIt is the investment arm of the Ayala Group in the BPO sector. LiveIt was previously a wholly-owned subsidiary of LiveIt Solutions, Inc. (“LSI”), a Philippine company incorporated in June 2006. In 2008, Azalea International converted US$123.9 million deposits on future subscription in LiveIt diluting LSI’s interest to 0.01%. In December 2009, LiveIt repurchased its shares from LSI giving Azalea International 100% ownership interest in LiveIt. LIVEIT INVESTMENTS LTD. LiveIt’s strategy is to acquire or invest in existing global BPO companies that have the potential to become a Global Top 5 leader in attractive sectors, and can leverage the Philippines. As of December 31, 2009, LiveIt has made cumulative investments of =P10.9 billion, or approximately US$228.8 million in four (4) investee companies in the Voice (through Stream Global Services, Inc.), Knowledge (through Integreon Managed Solutions, Inc.), Graphics (through Affinity Express Holdings Limited) and HR (through HRMall Holdings Limited) spaces. Stream Global Services, Inc. LiveIt started investing in voice BPO by using its wholly-owned subsidiary Newbridge International Investments, Inc. (“Newbridge”) to accumulate shares of eTelecare Global Solutions (“eTelecare”) in 2006. In December 2008, LiveIt together with Providence Equity Partners made a tender offer for eTelecare’s common shares and American Depositary Shares. After the successful tender offer, eTelecare was delisted from the NASDAQ and the Philippine Stock Exchange in January 2009 and August, respectively. In October 2009, eTelecare was merged with Stream Global Services, Inc. (“Stream”) , creating an approximately US$800 million revenue customer relationship management services company with approximately 30,000 employees in 50+solution centers in 22 countries. The combination positions Stream as a premium business process outsource service provider specializing in customer relationship management services including sales, customer care and technical support for Fortune 1000 companies. Post-merger, LiveIt’s ownership stake was 25.76% as of December 31, 2009. Integreon Managed Solutions, Inc. Integreon is the leading global provider of legal support, research and business services to law firms, financial institutions and corporations. Integreon completed several M&A initiatives in 2009 which included the carve-out of Osborne Clarke (a top 50 U.K. law firm)’s middle-office operations, creating the first onshore shared-services center for the U.K. legal sector, in March 2009; the asset acquisition of ONSITE3(TM), a leading global provider of electronic evidence solutions for law firms and corporations, based in Arlington, Virginia, in April 2009; and the acquisition of Grail Research, the Cambridge, Massachusetts based captive strategic research and decision support unit of the Monitor Group, in October 2009. As of December 31, 2009, LiveIt had an 86.16% ownership in Integreon. Affinity Express Holdings Ltd. Affinity Express is the leading global provider of high volume advertising and marketing design services to the newspaper, direct marketer, retail, corporate, advertising and promotional products industries. It has recently expanded its services to include new high growth markets (e.g., digital interactive services,

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yellow pages and corporate marketing communications services). Affinity Express serves more than 150 publications in North America, including numerous publications from the Sun Times Media Group, Canwest and Hearst Publications. As of December 31, 2009, LiveIt owned a 99.84% interest in Affinity Express. HRMall Holdings Ltd. HRMall was initially formed as the HR shared-services company for the Ayala group’s HR (administrative and strategic) and Payroll needs. HRMall is a BPO specialist focused on providing Human Resource-related services to organizations across multiple industry sectors in the Asia Pacific region. It currently services more than 20,000 employee-users. HRMall is the only Filipino company that has transitioned from HR Shared Services to HR BPO. HRMall Holdings is a wholly-owned subsidiary of LiveIt.

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Automotive Dealership AYALA AUTOMOTIVE HOLDINGS CORPORATION Ayala, through Ayala Automotive Holdings Corp. (“AAHC”) has eight Honda dealerships and five Isuzu dealerships nationwide. Through its strong dealership network AAHC will continue to pursue quality leadership and service excellence, affirming its commitment to total customer satisfaction. Honda Cars Philippines, Inc. Honda Cars, Philippines, Inc. is a joint venture between Ayala (50%), Honda Motors. Co. Ltd and RCBC. Honda Cars assembles and manufactures Honda automobiles for the Philippine market in Laguna Technopark. Isuzu Philippines Corporation Ayala has a 31% share in Isuzu Philippines Corporation a joint venture Isuzu Motors, Ltd., Mitsubishi and RCBC to produce Asian Utility Vehicles, pick-up tricks, small and medium-sized tricks and buses. Isuzu Philippines commenced production of commercial vehicles in June 1996. Research and Development Activities Amounts spent by AAHC on development with environmental laws are not material. Environmental Compliance Amounts spent by AAHC on compliance with environmental laws are not material. Customer Satisfaction Risk The operations of AAHC’s subsidiaries create risk of customers being dissatisfied with faulty or non-performing products or services. If not properly managed, this can adversely affect the company’s reputation which may result in decline in revenues and loss of market share. In response to this risk, AAHC has launched and enhanced several customer-focused programs that promote quality and service excellence. Regular and constant customer surveys/studies are conducted in assessing the effectives of these projects and identifying customer concerns and rising customer expectations. AAHC remains committed to its pursuit of total customer satisfaction to ensure its long-term growth. 2009 Highlights Key Products Honda passenger cars and Isuzu commercial vehicles

Market Position One of the country’s largest vehicle retail company with 9% share of

industry sales

2009 Highlights • Registered net income of =P219 million from dealership operations, significantly above 2008 earnings

• HCPI held a strong position at second in the passenger car segment while IPC ranked third in commercial vehicle segment. HCPI and IPC had a combined market share of 20%

• HCMI cornered 50% of total Honda network sales while IADI captured 31% of total Isuzu sales

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CV Segment

Van, 11%

SUV, 33%

Trucks & Buses, 4%

Pick-up, 15%

AUV, 37%

Strategic Initiatives • Sustain market leadership and profitability through service excellence and operating efficiencies

• Strengthen marketing and quality programs responsive to customer needs

• Expand network and operations for wider reach and better access to customers

• Enhance people-development programs for continuous skills-upgrading that will create competitive advantage.

• Collaborate closely with principals on the delivery of high quality products and services

• Venture into new allied businesses to complement traditional products and services as well as expand market reach

2009 turned out to be a better year for the Philippine automotive industry despite the economic downturn. The industry recorded car sales of 132,444 units, 6% higher than prior year’s 124,450 units. The strong growth was attributed to the aggressiveness of automotive players in introducing new models and various promotional offers as well as more affordable financing options within reach of consumers. Commercial vehicles (CV) accounted for the lion’s share of the market, comprising 65% of industry sales. For the entire year, 86,346 CV were sold, 8% better than last year’s 80,159 units. Introduction of new models and growth in all CV categories contributed to the increase in unit sales for the entire segment. Asian Utility Vehicles and Sports Utility Vehicles (SUV) dominated the CV segment accounting for 37% and 33%, respectively. Passenger cars (PC) accounted for 35% of total auto sales, with 46,098 units sold in 2009. This year’s PC sales were higher by 4% compared to the level a year ago. The subcompact cars took the biggest share in PC sales with a 62% market share. Honda Cars Philippines, Inc. (HCPI) remained at third spot in the local automotive market and ranked second in the PC segment. Its market share improved from 11% last year to 14% this year and culminated with 17,168 units, garnering a 20% increase from last year’s level. Honda’s growth was primarily driven by the remarkable performance of Honda's sleek and modern-designed compact sedan - the all new City 2009. The City accounted for more than half of Honda sales. The Ayala Honda dealerships accounted for 50% of total HCPI network sales and captured three out of the top five slots, with its dealership in Alabang as the leading dealer in the network. This year was challenging for Isuzu Philippines Corporation as competitors became aggressive in introducing new models especially in the SUV segment. As a result, Isuzu registered a 9% decline in 2009 and its share in total automotive sales slipped to 7% from 8% the prior year. The Ayala Isuzu

PC Segment

1.6 to 2.0L,

26%

1.3 to 1.5 liter,

62%

1.0-liter, 7%

2.4 to 3.5L,

3%

Luxury,

2%

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dealerships remained on top position and improved its market share to 31%. Isuzu Alabang was the top selling dealer in the Isuzu network while Isuzu Cebu, Inc. was the leading provincial dealer. The Ayala group of dealerships remains to be one of the largest vehicle retail groups in the country accounting for 9% of total industry sales. Ayala Automotive Holdings Corporation net income attributable to dealership operations reached =P219 million, higher than last year’s level due to higher vehicle sales. The automotive industry projects sustained growth in 2010. Factors that will affect sales include the improved economic condition, low interest rate environment, and strong overseas remittances from Filipinos working abroad. A key challenge the industry may face is the impact of the full implementation of Asean Free Trade Agreement (AFTA) and continued trade liberalization under various free trade agreements. This involves the elimination of tariffs which challenges the competitiveness of local assembly operations. However, the government, in support of the local automotive industry players, is finalizing a new Motor Vehicle Development Program that aims to push the Philippines towards global competitiveness in a liberalized intraregional trade arena. In addition, HCPI and IPC can capitalize on their strong brand image and optimize opportunities in this liberalized environment. 2009 Key Financial Highlights (in million pesos) 2005 2006 2007 2008 2009 Revenues 7,421 8,751 11,427 10,078 10,817 Net income attributable to dealership operations

207 250 304 178 219

Consolidated net income 223 262 387 275 229 Car unit sales 7,769 9,664 12,247 10,324 11,394 Return on equity (%) 10.5% 12.0% 17.5% 12.8% 8.6%

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International

Ayala's international operations are conducted primarily through AG Holdings Ltd. AG Holdings Ltd

Asia

ARCH Capital Management, our regional property fund management business, approached 2009 with a clear focus on risk given the effects of the global financial crisis and the severe impact of the ensuing liquidity crunch. Despite the turbulence and uncertainties, ARCH succeeded in accessing bank financing in the form of new loans, refinancing or loan upsizing for all portfolio investments. The speed of recovery in Asia surprised many, with market participants vying for distressed opportunities which failed to materialize. ARCH completed one investment in Foshan, China- a 1,211-unit residential development in one of the most affluent cities in Guangdong province. This project represents ARCH’s largest investment to date, with strong sales results recorded over the July-December period. ARCH’s Thailand and India portfolio continued to record steady sales, reflecting the emergence of market recovery for residential product offerings suited to local tastes and preferences. The Concordia joint venture in Macau obtained all requisite government approvals to proceed, facilitating planning for the development’s marketing launch in early 2010 to take advantage of the significant turnaround in the real estate market on the strength of recovery in the Macau gaming industry and visitor arrivals. The imminent launch of this project is an exciting prospect for ARCH’s fund investors as well as the management team.

In August 2009, AG Holdings established a small office in Shanghai to assist ARCH in business development and provide a solid underwriting base to review the Fund’s investment opportunities there. Given the large allocation of capital by ARCH to China, this dedication of resources to investment review is an appropriate commitment to further support ARCH's activities in its key Asian market. ARCH is presently reviewing a number of substantial transactions in China which are targeted for completion this year.

In the latter half of 2009, a decision was made to tighten the regional focus of AG by directing its efforts in a more focused manner through ARCH. As such, in 2010 the priority will be to reallocate resources in AG in selected markets and wind down its direct presence in others.

North America

In 2009, AG experienced significant losses in its US portfolio. The entire US real estate market suffered from a variety of financial and fundamental factors working against any kind of recovery. All of our residential projects were adversely impacted by slow sales and lower rents. Retail projects were hurt by credit contraction and higher unemployment in almost all geographic markets. The modest economic recovery that appeared to take hold at year’s end was not flowing through to sales and rentals. Absent stronger economic growth fundamentals, 2010 may deliver more disappointing news in the US real estate sector.

The approach being taken to remaining investments in the US portfolio is to carefully consider those assets that may be worth sustaining and to maintain a minimum management and support structure until some modest market recovery occurs. Regrettably, some further losses may be expected from the US portfolio in the absence of a dramatic recovery in key factors underpinning its real estate markets.

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EEMMPPLLOOYYEEEESS AANNDD LLAABBOORR RREELLAATTIIOONNSS Ayala is committed to promoting the safety and welfare of the 114 employees, 66 of which are managers and 48 are staff as of March 31, 2010. It believes in inspiring the employees, developing their talents, and recognizing their needs as business partners. Strong and open lines of communication are maintained to relay Ayala’s concern for their and safety, and deepen their understanding of Ayala’s value-creating proposition. All regular staff are covered by a new Collective Bargaining Agreement for the period January 1, 2010 to December 31, 2011. The Collective Bargaining Agreement generally provides for annual salary increment, and health and insurance benefits. Ayala has no record of strike or threat of a strike. Ayala intends to maintain its current headcount for the next 12 months.

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LLEEGGAALL PPRROOCCEEEEDDIINNGGSS Except as disclosed herein or in the Information Statements of the Ayala’s subsidiaries or affiliates which are themselves public companies or as has been otherwise publicly disclosed, there are no material pending legal proceedings for the past five years and the preceding years until March 16, 2010 to which the Company or any of its subsidiaries or affiliates or its Directors or executive officers is a party or of which any of its material properties are subject in any court or administrative government agency.

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OOWWNNEERRSSHHIIPP Shareholders

Members of the Zobel de Ayala family, individually and through their control of Mermac, Inc., a private holding company incorporated in the Philippines, are the majority shareholders of and effectively control Ayala. Mermac, Inc. held 50.92% of Ayala as of February 28, 2010. Members of the Zobel de Ayala family have been involved in Ayala’s business since its establishment in 1834. As of February 28, 2010, Ayala’s other principal shareholders were PCD Nominee Corporation (24.35%) and Mitsubishi Corporation (10.55%). Ayala’s 20 largest common shareholders as of February 28, 2010 were as follows:

Stockholder name

No. of common shares

Percentage (of common

shares) 1. Mermac, Inc. 253,074,330 50.92% 2. PCD Nominee Corporation (Non-Filipino) 121,335,907 24.35% 3. Mitsubishi Corporation 52,564,617 10.55% 4. PCD Nominee Corporation (Filipino) 36,394,098 7.30% 5. Shoemart, Inc. 16,282,542 3.27% 6. ESOWN Administrator 2009 1,813,994 0.36% 7. Henry Sy, Sr. 1,296,636 0.26% 8. SM Investment Corporation 1,067,175 0.21% 9. ESOWN Administrator 2008 893,795 0.18% 10. ESOWN Administrator 2007 694,289 0.14% 11. Philippine Remnants Co., Inc. 685,872 0.14% 12. ESOWN Administrator 2006 633,157 0.13% 13. Sysmart Corporation 515,760 0.10% 14. ESOWN Administrator 2005 463,297 0.09% 15. BPI TA 14105123 379,657 0.08% 16. Mitsubishi Logistics Corporation 300,427 0.06% 17. Aristón Estrada, Jr. 209,472 0.04% 18. Eduardo O. Olbes 163,328 0.03% 19. Insular Life Assurance Co. Ltd. 142,549 0.03% 20. AC ESOP/ESOWN Account 129,692 0.03%

As of February 28, 2010, 54.52% of the total outstanding shares of the Company or 240,041,414 common shares, 11,915,770 preferred “A” Shares and 57,890,950 preferred “B” shares are owned by the public.

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MMAANNAAGGEEMMEENNTT’’SS DDIISSCCUUSSSSIIOONN AANNDD AANNAALLYYSSIISS OOFF RREESSUULLTTSS OOFF OOPPEERRAATTIIOONNSS AANNDD FFIINNAANNCCIIAALL CCOONNDDIITTIIOONN

This section, Management’s Discussion and Analysis of Operations and Financial Condition should be read in conjunction with the Company’s consolidated financial statements and related notes. See the cautionary statement regarding forward-looking statements on page 1 of this Prospectus for a description of important factors that could cause actual results to differ from expected results. This section includes financial and operating data with respect to Ayala’s subsidiaries (Ayala Land, Inc., Integrated Micro-Electronics, Inc., AG Holdings, Ltd., Azalea Technology Investments, Inc., Azalea International Venture Partners, Ltd. and Ayala Automotive Holdings Corporation), associates (Bank of the Philippine Islands) and jointly controlled entities (Globe Telecom, Inc. and Manila Water Company, Inc.). This section should be read in conjunction with the financial statements of these subsidiaries, associates and jointly controlled entities. The financial statements of these subsidiaries, associates and jointly controlled entities as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 are available for viewing at the office of the Philippine Securities and Exchange Commission located at the SEC Building, EDSA, Greenhills, Mandaluyong City, or at these companies’ respective principal places of business. This section also includes discussion of financial ratios. These financial ratios are unaudited and are not measurements of profitability in accordance with Philippine Financial Reporting Standards (“PFRS”) and should not be considered as an alternative to net income or any other measure of performance which are in accordance with PFRS. FOR TWELVE MONTHS ENDED DECEMBER 31, 2009 Ayala Corporation generated consolidated revenues of =P76.3 billion in 2009, =P2.8 billion or 4% lower than prior year’s =P79.1 billion. The decline was attributed to the slight drop in consolidated sales and services and a =P1.6 billion decline in other income as 2008 included gains from the sale of certain assets at the holding company level as well as from Ayala Land’s land sales. Consolidated sales and services, which comprised 82% of consolidated revenues, dropped by 2% as a result of lower sales from the real estate (Ayala Land, Inc.) and electronics manufacturing units (Integrated Micro-Electronics, Inc. - IMI). ALI recorded lower revenues in 2009 mainly due to a decline in its construction and support businesses as it wound down external projects. Residential revenues dipped by 6% to =P14.2 billion versus prior year due to lower bookings. With GDP growth slowing in 2009, residential launches were deliberately held back during the year. This was, however, partly offset by construction accomplishment in its existing projects as well as a significant improvement in its leasing business in both commercial centers and office spaces. In all, ALI’s revenues declined by 10% to =P30.5 billion in 2009 from =P33.7 billion in 2008. Impacted by the slowdown in the global electronics industry as a result of the financial crisis, IMI’s revenues dipped by 7% to $18.9 billion due to the slowdown in operations of major customers of IMI Philippines and IMI Singapore. Revenues from several other customers dropped due to reduced customer demand and material shortages. In particular, revenues from a key Japanese original equipment manufacturer (OEM) in the optical disc drive (ODD) industry decreased significantly as market demand softened. Also, IMI’s decision to set aside its planned volume expansion for a key European automotive electronics OEM also impacted revenues in the short-term. The decline in consolidated revenues was partly mitigated by higher sales of the automotive unit (Ayala Automotive) and the business process outsourcing (BPO) units (Integreon and Affinity Express) which scaled up operations with several add on acquisitions. Ayala Automotive recorded higher car sales in 2009 (11,394 units in 2009 vs. 10,324 units in 2008) due to the strong sales of the new Honda City. Honda Cars sold 4,516 Honda City units which is 53% of the total dealership sales. This was, however, partly offset by the decrease in sales of Isuzu Automotive Dealerships.

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Revenues from BPO units also increased mainly due to Integreon’s acquisition of Onsite, although this was partly offset by the decrease in graphics revenue of Affinity Express given the generally weak US economic conditions. The decline in consolidated sales and services was partly compensated for by the stable equity earnings from associates and jointly controlled entities, which reached =P7.4 billion, the same level as the prior year. Higher net income from the telecom (Globe Telecom), banking (Bank of the Philippine Islands), and water distribution units (Manila Water Co., Inc.) despite the economic slowdown resulted in strong equity earnings. Globe Telecom posted 11% increase in net income to =P12.6 billion in 2009 with core net income of =P12.0 billion slightly higher than the =P11.8 billion posted in 2008. Service revenues were flat at =P62.4 billion. The 4% decline in the consumer wireless business was offset by gains in the broadband business, which rose by 74% to =P3.3 billion and fixed line data business, which increased by 23% to =P3.0 billion. As competition in the wireless industry intensified, Globe stepped up efforts to maintain its proportional share of revenues by focusing on continued expansion of its broadband business. Actual EBITDA was 3% lower than 2008 due to the overall decline in service revenues and higher subsidies as it ramped up its broadband business. EBITDA margin, however, remains high at 57% while return on equity improved to 25.7% from 21.4% in 2008. In 2009, Globe increased its target dividend yield from 70% to between 75% and 90% of prior year’s net income as it remains committed to achieving its optimal capital structure. Bank of the Philippine Islands (BPI) posted significantly higher net income for the year, up 33% to =P8.5 billion on the back of good revenue and business volume growth. Higher securities trading gains of =P1.4 billion versus a =P478 million loss in 2008 also contributed to earnings growth. Net interest income increased by =P1.94 billion. While overall net loans grew by only 2% as multinationals and top tier corporations paid down loans and took advantage of the liquidity and availability of funding in the capital markets, consumer and middle market loan growth was robust. Credit card receivables increased by 16%, SME loans by 11%, consumer loans by 10%, and local middle market names by 9%. While loans grew, BPI managed to improve its asset quality to a year-low non-performing loan ratio of 2.8%. BPI also retained its strength in the remittance business which increased by 15%, outpacing the industry’s 5% growth. This allowed BPI to capture 20% of the overseas Filipino remittance market. With improved earnings, BPI’s return on average equity likewise increased to 13%. Manila Water continued its strong performance by posting 16% growth in net income attributable to equity holders of MWC to =P3.2 billion on the back of higher revenue and continued improvement in operating efficiency. Revenues increased by 7% to =P9.5 billion due to higher tariff and water volume sales. The water utility reduced non-revenue water to 15.8%, a remarkable accomplishment from over 25% system losses in 2007, and posted collection efficiency of 100%. It also ramped up its wastewater initiatives, increasing sewer connections from 68,000 to 177,000 households, stepping up desludging services from 188,000 households to 291,000, and completing one sewage treatment plant while beginning construction of two more. Total cost and expenses were well managed, growing only by 8% despite water and wastewater expansion activities. Return on equity remained stable at 18%. The year 2009 was marked by Typhoon Ondoy and the damage it inflicted. Manila Water played a vital role in effective disaster management with 100% water supply restoration after a week of round-the clock operations following the calamity. Ondoy created additional expenses but had no major impact on the water utility’s bottomline. Collection was staggered in affected areas but comprised only 10% of the revenue base. Consolidated costs and expenses declined in line with the contraction in consolidated revenues. Consolidated cost and expenses fell by 3% to =P63.8 billion from =P66.0 billion the prior year. Costs of sales and services, which accounted for 77% of consolidated costs and expenses dipped by 1% to =P49.3 billion from =P50.0 billion the prior year. This was mainly a result of the decline in cost of sales and services at ALI, which was in line with the fall in revenues, and IMI’s lower manpower costs due to the redundancy program implemented in 2009 as well as lower sub-contracting and inventory costs. General and administrative (G&A) expenses on a consolidated basis also declined by 3% to =P9.2 billion with lower expenses from ALI and IMI.

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Consolidated interest expense and other financing charges declined by 23% to =P3.8 billion from nearly =P5 billion the prior year. This was mainly due to the currency-hedging related losses at IMI booked in 2008, which negated the impact of higher loan levels at ALI and the parent company level. At the holding company level, interest and financing charges were flat despite the increase in loan levels as the company actively reduced lowered financing cost over the last few years. Average cost of debt at the parent level in 2009 has decreased to 5.9% compared to 9.5% three years ago. In 2009 the company continued to prepay =P7.2 billion in debt, replacing these with newly raised funds at lower cost. The parent company’s net debt has declined substantially to =P4.3 billion from =P8.7 billion in 2008 and a high of =P36.2 billion in 2004, allowing it to maintain a very comfortable net debt to equity ratio of 0.04 to 1. Likewise, on a consolidated basis, the company is in a very comfortable financial position with consolidated net debt to equity at 0.06 to 1. Consolidated net income attributable to equity holders of the parent for the full year 2009 reached =P8.2 billion at par with prior year’s level despite a much more challenging economic environment. ALI recorded 16% lower net income attributable to equity holders of ALI of =P4.0 billion from =P4.8 billion last year, which includes gains from the sale of an asset in 2008. Excluding the one-off gain, however, net income attributable to equity holders of ALI contracted only 2% year-on-year. IMI managed to post 160% growth in net income attributable to equity holders of IMI to US$10.1 million. The jump in income can be primarily attributed to non-recurring items--fire insurance gain of US$5.0 million in 2009 coupled with hedging losses of US$33.4 million in 2008. Net income attributable to equity holders of IMI without non-recurring items in 2009 was US$5.0 million. Significant improvement in Ayala’s BPO units also underpinned the stability in consolidated earnings this year. While LiveIt recorded net loss of =P565 million for 2009, this was better than the =P948 million loss in 2008. Income from an US$8.8 million gain on the eTelecare share exchange and a US$4.9 million gain from the Integreon-Onsite bargain purchase more than offset the unbudgeted acquisition expenses for Stream and Integreon. Affinity’s significant improvement in financial results also contributed to LiveIt’s improved bottomline. International real estate arm, AG Holdings, recorded a net loss of =P433 million, as the U.S. economic meltdown continued to impose provisions for assets in North America. Asian operations remained solid with ARCH Capital Management posting profit in 2009. Projects in Thailand, China and Macau did better than or as expected. Take-up for three Thai projects ranged between 61% and 86%. In China, Phase I take-up was 44% for apartments and 58% for villas. The Macau project’s master layout secured government approval. In summary, while net earnings were flat in 2009, impacted by various factors both external and internal, the company maintains a healthy financial and liquidity position across the group. Debt and debt to equity ratios are at very comfortable levels, cash resources are sufficient to pursue the respective growth agenda of each of the operating units, and solvency and liquidity ratios are well within comfortable limits. As recovery presumably commenced in the second half of 2009, a gradual recovery is expected in 2010. While there remain uncertainties in the economic environment, it is expected that each of the operating units will bounce back in strong fashion given their strong financial and market positions and growth initiatives set in place.

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Key performance indicators of the Company and its s ignificant subsidiaries The table sets forth the comparative key performance indicators of the Company and its significant subsidiaries.

Ayala Corporation (Consolidated) (In million pesos, except ratios) 2009 2008 2007 Revenue 76,293 79,108 78,767 Net Income Attributable to Equity Holders of the Parent 8,154 8,109 16,257 Total Assets 232,479 220,188 196,131 Total Debt 56,523 54,484 50,032 Equity Attributable to Equity Holders of the Parent 102,260 97,311 86,887 Current Ratio1 2.57 2.52 1.92 Debt to Equity Ratio2 0.55 0.56 0.58

Ayala Land, Inc. (Consolidated) (In million pesos, except ratios) 2009 2008 2007 Revenue 30,455 33,749 25,707 Net Income Attributable to Equity Holders of ALI 4,039 4,812 4,386 Total Assets 108,071 100,589 82,981 Total Debt 18,812 16,752 10,139 Equity Attributable to Equity Holders of ALI 52,392 49,028 45,705 Current Ratio1 1.95 1.88 1.65 Debt to Equity Ratio2 0.36 0.34 0.22

Integrated Micro-Electronics, Inc. (Consolidated)* (In thousand US dollars, except ratios) 2009 2008 2007 Revenue 395,502 441,145 422,107 Net Income Attributable to Equity Holders of IMI 10,066 (16,830) 35,693 Total Assets 302,082 306,958 305,772 Total Debt 48,302 71,110 71,008 Equity Attributable to Equity Holders of IMI 166,690 159,631 158,152 Current Ratio1 1.89 1.70 1.70 Debt to Equity Ratio2 0.29 0.45 0.45

* IMI’s functional currency is US dollars 1 Current Assets divided by Current Liabilities 2 Total of short-term debt and long-term debt divided by the equity attributable to the parent. In general, the Company posted strong results with the improvements in most of the performance indicators. Despite the overall economic slowdown, the above key indicators were within targeted levels. Net income to equity holders remained stable even with the expected declines in revenues. The marked improvements in financial position items (total assets, stockholders’ equity and current and debt to equity ratios) were all result of focused financial management. The Company will continue to adopt the following benchmarks: a) current ratio of not lower than 0.5:1.0; and b) debt to equity ratio not to exceed 3.0:1.0, both supported by prudent debt management policies. There are no known trends, events or uncertainties that will result in the Company’s liquidity increasing or decreasing in a material way. There were no events that will trigger direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation. Likewise, there were no material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons created during the reporting period.

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In 2008, AYC Holdings, Inc. issued promissory notes and advances to EGS Corp. and EGS Acquisition Corp. amounting to P4,986.1 million. The advances amounting to =P665.3 million is payable in one year and bear interest at the rate of 12% per annum. The promissory notes amounting to =P4,320.8 million is payable over a period of five years and bear interest at the rate of 12% to 18% per annum. The notes and advances were partially collected on October 1, 2009. The balance amounting to =P1,655.8 million owed by EGS Corp. was assigned to NewBridge in 2009. As discussed in Note 10 to the consolidated financial statements, in a stock-for-stock exchange between NewBridge and Stream in 2009, the advances assigned to NewBridge were effectively converted to Stream shares. The advances of AYC Holdings to New Bridge are non-interest bearing with a term of one-year. As of December 31, 2009, the receivables from related parties are generally short-term in nature. The guarantees provided by Ayala Corp to AYC Finance and Ayala International North America (AINA) to its subsidiary have been disclosed in Note 34 to consolidated financial statements. As of December 31, 2009, the payables to related parties are non-interest bearing. =P105 million of the payables to related parties are current and classified under Accounts Payable and Accrued Expenses. The majority of the non-current payables to related parties are payable within 1 – 2 years. The maturity profile of the Group’s financial liabilities are presented in Note 30 to the consolidated financial statements. At the holding company level, Ayala Corp. has allocated =P7 billion for identified capital expenditure projects in 2010. The Company is prepared to increase this should there be strategic opportunities to expand. The Company has sufficient internal cash, which amounted to =P26 billion as of year-end 2009. There are no seasonal aspects that may have a material effect on the financial condition of the Company. Causes for any material changes (Increase or decrease of 5% or more in the financia l statements) Balance Sheet items (December 31, 2009 Vs December 31, 2008) Cash and cash equivalents – 6% increase from =P42,886mln to =P45,657mln

Dividends received net of dividends paid, proceeds from new loans availed and disbursements to fund various investments by the parent company partly offset by the placements by the real estate group in short-term investments. As a percentage to total assets, cash and cash equivalents slightly increased from 19% to 20% as of December 31, 2008 and December 31, 2009, respectively.

Short-term investments – 352% increase from =P1,009mln to =P4,561mln

Higher money market placements with maturity of more than 3 months up to 6 months by the real estate group. As a percentage to total assets, short-term investments is at 2% as of December 31, 2009 and 0.5% as of December 31, 2008.

Current accounts and notes receivable – 8% increase from =P23,284mln to =P25,233mln

Higher trade receivables by the real estate, automotive, international and electronics, information technology and business process outsourcing services groups. As of December 31, 2009 and December 31, 2008, current accounts and notes receivable remained at 11% of the total assets. Inventories – 8% increase from =P10,011mln to =P10,797mln

Increase due to new developments and projects of the real estate group and higher vehicles inventory of the automotive group partly offset by lower inventory of the electronics, information technology and business process outsourcing services groups. This account remained at 5% of the total assets as of December 31, 2009 and December 31, 2008, respectively.

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Other current assets – 8% decrease from =P7,090mln to =P6,547mln Largely due to matured government securities and lower prepaid expenses partly offset by investment in fixed income securities of the real estate group. This account remained at 3% of the total assets as of December 31, 2009 and December 31, 2008. Noncurrent accounts and notes receivable – 60% decrease from =P6,694mln to =P2,658mln Payment of advances by an associate of the electronics, information technology and business process outsourcing services group partly offset by higher receivables of the real estate group. Noncurrent accounts and notes receivable is at 1% and 3% of the total assets as of December 31, 2009 and December 31, 2008. Land and improvements – 12% increase from =P15,757mln to =P17,583mln Attributable to land acquisitions and incidental costs related to site preparation and clearing of various properties of the real estate group. This account is at 8% of the total assets as of December 31, 2009 and 7% as of December 31, 2008.

Investments in associates and jointly controlled entities – 5% increase from =P68,140mln to =P71,557mln Investments in associates and jointly controlled entities account includes the Company’s and its subsidiaries’ investments in various associates which are being accounted for under the equity method. These associates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, among others. The increase is due to the equity share in net earnings of the associates and joint ventures and additional investments in 2009. This account is at 31% of the total assets as of December 31, 2009 and December 31, 2008. Investment in bonds and other securities – 16% increase from =P3,065mln to =P3,543mln Primarily due to improved market prices of securities held by the group, new investments in fixed income securities of the real estate group and new investments of the international group. This account is at 2% of the total assets as of December 31, 2009 and 1% as of December 31, 2008. Investment in real properties – 36% increase from =P21,345mln to =P29,090mln Primarily due to the completion of malls and buildings owned by the real estate group. As a percentage to total assets, investment in real properties is at 13% and 10% as of December 31, 2009 and December 31, 2008, respectively. Property, plant and equipment – 44% decrease from =P13,885mln to =P7,772mln Reclassification of the real estate group’s operational and completed buildings to investment in real properties account and 2009 depreciation expense of the electronics, information technology and business process outsourcing services group. As of December 31, 2009 and December 31, 2008, the group’s property, plant and equipment account is at 3% and 6% of the total assets, respectively. Deferred tax assets – 23% increase from =P1,133mln to =P1,396mln Due to higher unrealized sales collection by the real estate group. As of December 31, 2009 and December 31, 2008, this account remained at 1% of the total assets. Pension assets – 13% increase from =P117mln to =P132mln Increase in pension assets of the electronics, information technology, business process outsourcing services group. This account is at 0.06% and 0.05% of the total assets as of December 31, 2009 and December 31, 2008, respectively. Intangible assets – 19% increase from =P3,865mln to =P4,612mln Excess of the acquisition cost over the fair value of the identifiable assets and liabilities of companies acquired by the electronics, information technology and business process outsourcing services group in 2009. As of December 31, 2009 and December 31, 2008, this account remained at 2% of the total assets.

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Other noncurrent assets – 30% decrease from =P1,906mln to =P1,342mln Partly caused by amortization of project development cost of the electronics information technology and business process outsourcing services group. Other noncurrent assets remained at 1% of the total assets as of December 31, 2009 and December 31, 2008. Income tax payable – 136% increase from =P215mln to =P506mln Higher taxable income of the real estate and electronics, information technology and business process outsourcing services groups. As a percentage to total liabilities, this account is at 1% and 0.2% as of December 31, 2009 and December 31, 2008, respectively. Current portion of long-term debt – 66% increase from =P1,479mln to =P2,453mln Largely due to the reclassification of the parent company’s and real estate group’s current maturing loans from long-term debt. As of December 31, 2009 and December 31, 2008, current portion of long-term debt is at 3% and 2% of the total liabilities, respectively. Other current liabilities – 82% increase from =P1,554mln to =P2,822mln Increase in customers’ deposits by the real estate group. Other current liabilities account is at 3% and 2% of the total liabilities as of December 31, 2009 and December 31, 2008, respectively. Deferred tax liabilities – 12% increase from =P186mln to =P207mln Decrease in corporate tax rate from 35% to 30% beginning January 1, 2009. As a percentage to total liabilities, this account is at 0.2% as of December 31, 2009 and December 31, 2008. Pension liabilities – 53% decrease from =P491mln to =P228mln Largely due to the adjustment made to reflect the latest actuarial valuation of the parent company and real estate group. This account is at 0.2% and 0.5% of the total liabilities as of December 31, 2009 and December 31, 2008, respectively. Other noncurrent liabilities – 20% increase from =P7,588mln to =P9,109mln Largely due to increase in construction and security deposits of the real estate group. As a percentage to total liabilities, this account slightly increased from 8% to 9% as of December 31, 2008 and December 31, 2009, respectively. Share-based payments – 50% increase from =P705mln to =P1,060mln Increase in share-based payments of the electronics, information technology and business process outsourcing services group. Retained earnings – 7% increase from =P61,604mln to =P65,739mln Increase is due to the 2009 net income net of dividends declared for the year. Cumulative translation adjustment – 39% decrease from (=P969mln) to (=P1,351mln) Mainly due to forex rate changes. Net unrealized gain on available-for-sale financial assets – 120% increase from (=P613mln) to =P124mln Mainly due to improvement in the market prices of securities held by the group. Noncontrolling interest – 7% increase from =P30,876mln to =P33,158mln Increase is due to the Noncontrolling interests’ share in 2009 net income.

Income Statement items (YTD December 31, 2009 Vs YTD December 31, 2008) Interest income – 11% increase from =P2,243mln to =P2,497mln Due to higher investible funds in 2009 by the parent company. This account remained at 3% of the total revenue in 2009 and 2008.

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Other income – 30% decrease from =P5,417mln to =P3,809mln Substantially lower capital gains from share sales in 2009 as compared to 2008. Last year also includes the real estate group’s capital gain on sale of 3 subsidiaries namely, Piedmont Property Ventures, Inc., Stonehaven Land, Inc. and Streamwood Property, Inc. Decrease is partly offset by the gain on exchange of shares by the electronics, information technology, business process outsourcing services group. This account is 5% and 7% of the total revenue in 2009 and in 2008, respectively.

Interest and other financing charges – 23% decrease from =P4,937mln to =P3,822mln Largely due to cost of unwinding the hedge contract of the electronics, information technology, business process outsourcing services group in 2008 offset partially by higher debt level of the real estate group in 2009. This account is 6% of the costs and expenses in 2009 and 7% in 2008. Other charges – 10% decrease from =P1,595mln- to =P1,435mln Mainly due to the provisions for various assets of the real estate group. This account is 2% of the costs and expenses in both 2009 and 2008. Provision for income tax – 30% decrease from =P2,418mln to =P1,699mln Primarily due to lower taxable income of the real estate group and reduction of income tax rate from 35% to 30% beginning January 1, 2009. FOR TWELVE MONTHS ENDED DECEMBER 31, 2008 Ayala Corporation generated consolidated revenues of =P79.1 billion in 2008, =P341.8 million higher compared to prior year’s consolidated revenues of =P78.8 billion. While consolidated sales and services posted healthy growth and rose by 13% to =P64.1 billion, this was partly offset by lower equity earnings from associates and jointly controlled entities as well as lower capital gains realized during the year. Consolidated sales and services mainly contributed 81% of Ayala’s consolidated revenues. Revenues of the real estate, electronics, and business process outsourcing (BPO) businesses continued to post healthy growth during the year. Despite the global economic crisis that continue to threaten appetite for real estate products, ALI posted good top-line growth across its major business segments, with residential revenues up 18%, revenues from its commercial centers up 3%, and corporate business revenues up by 10%. Its support business in construction also posted very strong growth with the completion of several new projects. ALI posted record earnings of =P4.8 billion in 2008, 10% higher than the prior year. The electronics business under Integrated Microelectronics, Inc. (IMI) posted a 5% growth in revenues in US dollar terms with half of the revenues contributed by its operations in Singapore and China which rose by 13% versus last year. This offset the 3% decline in Philippine and US operations. IMI’s expansion of business with a leading Chinese telecommunications company and the generation of ten new customer programs helped cushion the slowdown in the global electronics sector. IMI’s operating income remained positive at US$17 million, however, a non-recurring loss from currency hedging contracts as well as a one-time provision for manpower expenses and inventory obsolescence expenses resulted to a US$17 million loss in 2008. Excluding these non-recurring items, IMI’s net income would have reached US$32 million. On a combined basis, the investee companies of LiveIt, Ayala’s BPO investment arm, recorded revenue growth in US dollar terms of 15%, and achieved revenues of US$344.1 million and EBITDA of US$30.2 million in 2008, LiveIt’s second full year of operations. The BPO units further diversified their client base in 2008 with eTelecare winning 11 new clients and 31 new programs, Integreon adding 14 new customers across the corporate, legal and financial services sectors, and Affinity Express now serving over 140 publications of seven of the top 25 newspaper companies in the US. However, they posted a combined net loss, of which LiveIt’s share was =P874 million, due primarily to factors such as one-time non-recurring expenses related to the eTelecare tender offer, non-cash accounting charges, such as stock compensation expenses and the amortization of intangibles related to the investments in investee

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companies, and unfavorable foreign exchange forward contracts that eTelecare entered into. LiveIt, together with Providence Equity Partners, completed the tender offer for eTelecare’s common shares and American Depositary Shares last December resulting in the acquisition of 98.7% of eTelecare’s shares. Overall, the company remains positive about the growth trajectory of the BPO sector. Ayala expects that, as in past recessions, outsourcing will continue to grow in the short term but at a slower pace, and then will experience accelerating growth in the medium to long term, as companies intensify their cost-cutting. Lower equity earnings from associates and jointly controlled entities as well as lower capital gains during the year altogether capped growth of consolidated revenues. Equity earnings from associates declined by 24% to =P7.4 billion from =P9.8 billion due to lower net income of its telecom and banking units as well as a net loss recorded by its international real estate operations under AG Holdings. Telecom unit under Globe Telecom posted a 15% decline in net income in 2008 to =P11.3 billion. While it continued to experience strong wireless subscriber growth as well as ramping up of broadband subscribers, capital investments to support the broadband technology platform and a more intensely competitive market environment impeded margin expansion. Globe Telecom’s revenues, however, remained steady even amidst slowing domestic consumption. Consolidated service revenues reached =P62.9 billion from =P63.2 billion the prior year. Wireless revenues were flat amidst a 22% growth in its subscriber base while revenues from its wireline business increased by 7%, driven by its corporate data and broadband businesses. Globe’s broadband subscriber base grew by 84% in 2008 with the highest net adds noted in the fourth quarter. Higher operating expenses capped EBITDA but EBITDA margin remained high at 58% as costs arising from broadband investments lowered margins. Wireless EBITDA margin continues to be robust at 65% while wireline EBITDA margins have been under pressure given the dynamics of the start-up broadband business. Despite lower earnings this year, Globe’s free cash flow remains strong. It recently declared its first semi-annual cash dividend of =P32 per share, which puts Globe among the highest in dividend yields in the Philippine Stock Exchange. Banking unit under Bank of the Philippine Islands, also posted lower net income which fell by 36% to =P6.4 billion as revenues fell due to a decline in securities trading income and a decline in the contribution of the insurance company due largely to non-recurring investment income. BPI, achieved good business volume growth. Net loans expanded by an unprecedented 17%, driven by strong demand from corporate and retail consumers. This was the second straight year BPI posted double-digit loan growth. Despite the growth in loans, asset quality continued to improve with net 30-day non-performing loans ratio down to 3.0%. BPI’s deposit base expanded by 5% to hit =P540 billion by year-end, with total customer funds and assets held in trust up by 8.9%. The bank’s remittance business also saw strong growth, up 35%, with volume reaching US$4.4 billion, significantly outpacing the industry’s 15%. BPI’s capital adequacy ratio of 14.2% remains well above the 10% regulatory minimum. Last December, the bank successfully issued =P5 billion in 10-year subordinated debt eligible as Lower Tier 2 capital in anticipation of possible acquisition opportunities. International real estate arm, AG Holdings, recorded a net loss of US$7.1 million mainly due to an extraordinary loss for provisions arising from a deemed impairment on a trading security. In addition, last year’s earnings also included a gain from the sale of The Forum in Singapore. Altogether, these offset the higher equity earnings from its water distribution business, Manila Water, which posted a 7% growth in net income to =P2.8 billion on the back of higher water sales volume complemented by further improvements in the company’s operating efficiency. Manila Water pursued an intensive capex program, spending a total of =P4.2 billion in 2008 as it accelerated the implementation of expansion projects and invested in new systems and processes. Billed volume went up by 4% to 387 million cubic meters as Manila Water expanded its customer base by 46,765 new household connections. In addition, the company managed to further reduce system losses by 6 percentage points to 19.6% from over 25% last year and from a high of 63% in 1997. This is the first time that Manila Water has brought its level of water losses to below 20%, which is significantly better than most of the company’s regional counterparts. The company also began construction on a number of sewerage treatment plants in 2008, with the aim of bringing sewerage coverage to 30% by 2012 from the present level of 16% for the East Zone.

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Lower capital gains realized during the period pushed Other Income on a consolidated basis 50% lower to =P5.4 billion from =P10.7 billion in 2007. Significantly higher capital gains were realized in 2007 as the company took advantage of the much higher market prices prevailing at that time to realize values from some of its investments. Consolidated costs and expenses outpaced revenue growth and rose by 13% to =P66.0 billion. Costs of sales and services, which accounted for 76% of consolidated costs and expenses, rose by 16% to =P50.0 billion from =P43.2 billion the prior year. This was broadly in step with the increase in consolidated sales and services and also a result of higher cost of sales, particularly at the electronics unit with higher cost of inventories. General and administrative (G&A) expenses on a consolidated basis was flat relative to last year at =P9.5 billion. Higher G&A expenses in ALI was offset by lower G&A expenses at the parent company level and in the electronics unit. Consolidated interest expense and other financing charges increased by 20% to =P4.9 billion in 2008 from =P4.1 billion in 2007. This was mainly due to currency-hedging related losses at IMI. Excluding this, consolidated interest and financing charges decreased by 16% to =P3.5 billion. At the holding company level, however, interest and financing charges continued to decline and has consistently declined over the past few years as the company actively reduced debt levels and lowered financing cost. Average cost of debt at the parent level in 2008 has decreased by over 200 basis points to 7.4% compared to 9.5% two years ago. In 2008 the company also prepaid debt and replaced these with newly raised funds at lower cost. The parent company’s net debt has declined substantially to =P8.7 billion from a high of =P36 billion in 2004, allowing it to maintain a very comfortable net debt to equity ratio of 0.09 to 1. Likewise, on a consolidated basis, the company is in a very comfortable financial position with consolidated net debt to equity at 0.11 to 1. While net earnings were impacted this year by various factors both external and internal, the company maintains a healthy financial and liquidity position across the group. Debt and debt to equity ratios are at very comfortable levels, cash resources are sufficient to pursue the respective growth agenda of each of the operating units, and solvency and liquidity ratios are well within comfortable limits. Amidst the height of the credit crisis last year, all of Ayala’s business units combined were able to raise =P23 billion in funds in the second half of last year, from August to December, effectively securing funding requirements for 2009. This began with ALI’s =P4 billion five-year fixed rate bond in August, IMI’s =P1.3 billion preferred share offering to its shareholders, Manila Water’s =P4 billion five-year fixed rate bond in October, Ayala Corp.’s issuance of perpetual preferred shares in November and BPI’s tier-2 capital raising in December. Globe also recently announced that it will also be issuing =P3 billion retail bonds in the first quarter of 2009. No doubt 2009 will be more challenging across all fronts as the full extent of the global financial crisis unfolds. While the company maintains a generally cautious stance given the current environment, it is expected that each of the operating units will remain resilient, achieve steady top-line performance and continue to contribute positive earnings in the coming year. Material Changes in the 2008 Financial Statements (Increase/Decrease of 5% or more in the Financial Statements) Balance Sheet items (December 31, 2008 Vs December 31, 2007) Cash and cash equivalents – 16% increase from =P36,836mln to =P42,886mln

Dividends received net of dividends paid, proceeds from sale of shares and issuance of preferred shares partly offset by loan repayments and disbursements to fund various investments by the parent company,

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issuance of bond and proceeds from sale of shares in Piedmont Property Ventures, Inc., Stonehaven Land, Inc. and Streamwood Property, Inc. by the real estate group and proceeds from the issuance of preferred shares by the electronics, information technology and business process outsourcing services group. As a percentage to total assets, cash and cash equivalents remained 19% as of December 31, 2007 and December 31, 2008, respectively.

Short-term investments – 73% decrease from =P3,688mln to =P1,009mln

Parent company’s money market placements were converted to cash and cash equivalents and lower investment management account by the real estate group. As a percentage to total assets, short-term investments are at 2% of the total assets as of December 31, 2007 and 0.5% as of December 31, 2008.

Accounts and notes receivable-current – 38% increase from =P16,823mln to =P23,284mln

Increase in advances to contractors and suppliers and reclassification of a subsidiary’s receivables from non-current receivables by the real estate group, advances to fund new investments by the international group and parent company, higher receivables by the electronics, information technology and business process outsourcing services group. As of December 31, 2008 and December 31, 2007, accounts and note receivable is at 11% and 9% of the total assets, respectively. Inventories – 13% increase from =P8,843mln to =P10,011mln

Development costs for new and existing real estate projects by the real estate group. The automotive group however, has a lower inventory level in 2008 due to lower demand. As a percentage to total assets, inventories remained at 5% as of December 31, 2007 and December 31, 2008.

Other current assets – 99% increase from =P3,571mln to =P7,090mln Largely due to increase in FVPL financial assets, higher prepaid expenses, inventory of supplies and creditable withholding tax by the real estate group. This account is at 2% and 3% of the total assets as December 31, 2007 and December 31, 2008, respectively.

Noncurrent accounts and notes receivable – 67% increase from =P4,010mln to =P6,694mln Largely due to advances for investments by the parent company. Noncurrent accounts and notes receivable slightly increased from 2% of the total assets as of December 31, 2007 to 3% as of December 31, 2008.

Investment in bonds and other securities – 23% increase from =P2,493mln to =P3,065mln New investments by the parent company and increase in value of investments owned by the international group partly offset by the sale of investments and decrease in marked to market valuation of investments by the electronics, information technology and business process outsourcing services group. This account is 1% of the total assets as of December 31, 2007 and December 31, 2008. Investment in real properties – 23% increase from =P17,416mln to =P21,345mln Primarily due to disbursements related to construction of buildings owned by the real estate group. As a percentage to total assets, investment in real properties is at 9% and 10% as of December 31, 2007 and December 31, 2008, respectively. Property, plant and equipment – 63% increase from =P8,493mln to =P13,885mln Real estate group’s disbursements for on-going projects and acquisition of an aircraft by a subsidiary. As of December 31, 2007 and December 31, 2008, the group’s property, plant and equipment account is at 4% and 6% of the total assets, respectively. Deferred tax assets – 15% increase from =P984mln to =P1,133mln Due to higher recognized sales by the real estate group. As of December 31, 2008 and December 31, 2007, the group’s deferred tax asset remained at 0.5%of the total assets, respectively.

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Pension assets – 16% decrease from =P141mln to =P117mln Decrease in pension assets of the electronics, information technology, business process outsourcing services group. This account remained at 0.1% of the total assets as of December 31, 2007 and December 31, 2008. Intangible assets – 18% increase from =P3,276mln to =P3,866mln Additional intangible assets, higher peso exchange rate partly offset by amortization of intangible assets in 2008 by the electronics, information technology and business process outsourcing services group and goodwill arising from the acquisition of new subsidiaries by the real estate group. As a percentage to total assets, this account remained 2% as of December 31, 2007 and December 31, 2008. Other noncurrent assets – 9% decrease from =P2,087mln to =P1,906mln Mainly due to prepaid items charged to various projects by the real estate group. As a percentage to total assets, this account remained at 1% as of December 31, 2007 and December 31, 2008. Accounts payable and accrued expenses – 23% increase from =P22,261mln to =P27,484mln Increase in accrual of salaries, equipment rental and cost of materials by the real estate group and trade payables and accrual of personnel related expenses by the electronics, information technology, business process outsourcing services group partly offset by lower inventory pull-outs by the automotive group. As of December 31, 2007 and December 31, 2008, this account is at 27% and 30% of the total liabilities, respectively. Short-term debt –5% increase from =P2,634mln to =P2,755mln Loans availed by the international and electronics, information technology, business process outsourcing services groups partly offset by partial payments of loans by the real estate and automotive groups. As of December 31, 2007 and December 31, 2008, this account remained at 3% of the total liabilities. Income tax payable – 25% decrease from =P286mln to =P215mln Higher creditable withholding tax recognized by the real estate group. As a percentage to total liabilities, this account is at 0.35% and 0.23% as of December 31, 2007 and December 31, 2008, respectively. Current portion of long-term debt – 84% decrease from =P9,513mln to =P1,479mln Decrease is due to the partial payment of loans by the parent company and the real estate group. As of December 31, 2007 and December 31, 2008, this account is at 12% and 2% of the total liabilities, respectively. Long-term debt – 33% increase from =P37,885mln to =P50,250mln Issuance of fixed rate bonds by the real estate group and new loans availed by the parent company net of repayments. As a percentage to total liabilities, this account is at 46% as of December 31, 2007 and 55% as of December 31, 2008. Deferred tax liabilities – 19% increase from =P156mln to =P186mln Mainly from operations of the real estate group. As a percentage to total liabilities, this account remained at 0.2% as of December 31, 2007 and December 31, 2008. Pension liabilities – 8% decrease from =P532mln to =P491mln Largely due to adjustment made to reflect latest actuarial valuation of the real estate group. This account remained at 1% of the total liabilities as of December 31, 2007 and December 31, 2008. Other noncurrent liabilities – 11% increase from =P6,818mln to =P7,588mln Mainly due to increase in customer and security deposits, deferred interest income on advances and unearned management fees of the real estate group. This account remained constant at 8% of the total liabilities as of December 31, 2007 and December 31, 2008. Paid-up capital – 39% increase from =P26,855mln to =P37,252mln Largely due to the 20% stock dividend and issuance of preferred shares in 2008.

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Share-based payments – 17% increase from =P604mln to =P705mln Increase in stock options granted. Cumulative translation adjustment – 58% decrease from (=P2,297mln) to (=P969mln) Mainly due to forex rate changes. Retained earnings – 2% increase from =P60,173mln to =P61,604mln Attributable to 2008 net income net of cash and stock dividends declared. Net unrealized gain on available-for-sale financial assets – 137% decrease from =P1,712mln to (=P631mln) Due to lower revaluation of investments in securities. Parent company preferred shares held by a subsidiary – 100% increase from -0- to =P100mln Parent company preferred shares held by the real estate group Treasury shares – 245% increase from =P160mln to =P551mln Due to buy-back of shares. Noncontrolling interest – 12% increase from =P27,609mln to =P30,876mln Largely due to share of minority holders in 2008 net income.

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Income Statement items (YTD December 31, 2008 Vs YTD December 31, 2007) Sales and services – 13% increase from =P56,578mln to =P64,053mln Primarily due to higher revenues from residential, strategic landbank, construction, shopping centers and corporate businesses of the real estate group, higher sales by the electronics, information technology and business process outsourcing services group partly offset by lower revenue from the automotive group.

Sales and services contributed 72% of the total revenue in 2007 and 81% in 2008. Equity in net earnings of associates and joint ventures – 24% decrease from =P9,767mln to =P7,396mln Largely due to lower equity earnings generated from the associates of the parent company and the international group. This account is 12% and 9% of the total revenue in 2007 and in 2008, respectively. Interest income – 32% increase from =P1,693mln to =P2,243mln Due to higher investible funds in 2008. This account is 2% of the total revenue in 2007 and 3% in 2008. Other income – 50% decrease from =P10,728mln to =P5,417mln Largely due to lower capital gains and forex gain in 2008 by the parent company. This account is 7% and 14% of the total revenue in 2008 and in 2007, respectively.

Cost of sales and services – 16% increase from =P43,169mln to =P50,014mln Relative to higher sales. Cost of sales and services is 76% and 74% of the total costs and expenses for the period ending December 31, 2008 and 2007, respectively.

Interest expense and other financing charges – 20% increase from =P4,120mln to =P4,937mln Charges on unwinding of hedge contracts by the electronics, information technology and business process and outsourcing group, increase in loan level by the real estate group, partly offset by lower interest expense due to lower loan levels and prudent debt management by the parent company. This account is 7% of the total costs and expenses for the periods December 31, 2008 and 2007, respectively. Provision for income tax – 23% increase from =P1,972mln to =P2,418mln Due mainly to higher taxes paid by the real estate group and the parent company. FOR TWELVE MONTHS ENDED DECEMBER 31, 2007 Ayala Corporation posted record consolidated revenues and net income in 2007. Despite the uncertainties looming in global financial markets in the latter part of the year, the domestic operating environment remained generally positive with economic fundamentals largely remaining intact. The main drivers of domestic consumption, particularly the robust overseas workers’ remittances, low domestic interest rate, revival of sectors like power and infrastructure as well as greater activity across several industries continued to underpin the growth of the Ayala group’s major businesses, particularly in property, telecom, banking, water, and automotive. However, the peso’s continued strength has also impacted the export-oriented businesses in the portfolio, particularly in the electronics and business process outsourcing services. But overall, the company’s growth momentum remained solid this year as the company also realized values from its portfolio and as operating units achieved generally higher earnings.

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Consolidated revenues reached =P78.8 billion, up 12% versus the prior year driven by a healthy growth in consolidated sales and services, higher equity in net earnings, interest income, and gains from the sale of shares particularly at the parent level. Consolidated sales and services increased by 6% to =P56.6 billion due mainly to higher unit sales of Ayala Automotive, higher contribution from the newly acquired companies of the electronics business as well as the new investments in business process outsourcing (BPO) under LiveIt. Growth, however, was partly weighed by the marginal revenue growth of the real estate group. While underlying demand across all of the company’s real estate products remained strong as reflected in strong residential unit sales and high occupancy rates of its commercial centers and business office portfolio, ALI recorded only a slight revenue expansion as a result of the standardization of revenue recognition policy, which had the effect of accelerating its revenues in 2006. Sales and services accounted for 72% of total consolidated revenues in 2007. Equity in net earnings of associates and joint ventures reflected an 18% increase to =P9.8 billion from =P8.2 billion in 2006. The strong earnings growth of the parent company’s key affiliates, particularly Globe Telecom, which posted a 13% growth in net income, banking unit, Bank of the Philippine Islands (BPI), which posted an 11% increase in net income, as well as the higher earnings of the associates of ALI altogether resulted in higher equity earnings for the group. Equity earnings accounted for 12% of the company’s total revenues in 2007. Consolidated revenues were further boosted by capital gains which pushed the Other Income account up by 53% to =P10.7 billion. A substantial part of this was generated through value realization initiatives at the parent level as it recognized =P7.3 billion in gains from the sale of shares in ALI, BPI, and Globe as market values during the year reached attractive levels for value realization. On the cost side, consolidated cost and expenses increased by 8% to =P58.4 billion. A substantial part of this was due to a 6% increase of consolidated cost of sales and services to =P43.2 billion, which was very much in line with the growth of consolidated sales and services. General and administrative expenses (GAE), on the other hand, rose by 23% to =P9.5 billion stemming from expenses related to capacity expansion initiatives and amortization expense of the new BPO businesses, higher manpower and technology integration-related expenses of the electronics group. Other charges increased by 306% to =P1.6 billion as a result of non-cash, non-operating charges from the impairment loss on goodwill of the electronics, information technology and business process outsourcing services group, particularly Affinity Express and partly Integreon. Consolidated interest expense and other financing charges declined by 18% to =P4.1 billion from =P5 billion the prior year. This was due to a substantial reduction in average funding costs. At the holding company level in particular, the continued decline in domestic interest rates has helped reduce financing expense significantly. Financing expense at the holding company level reached =P3 billion in 2007, 26% lower than the prior year. In 2007 the parent company pre-paid a total of =P14 billion worth of debt that had an average cost of 11.8%. Refinancing with lower cost debt has brought down the average cost of parent company’s outstanding debt in 2007 to 7.4% from 9.5% the prior year. Net debt at the parent level has also been substantially reduced and is now down to =P13.3 billion, putting parent level net debt-to-equity ratio even lower at 0.15 to 1 from 0.26 to 1 at the beginning of the year. Even on a consolidated basis, consolidated debt by year-end 2007 was lower at =P50 billion. With cash, cash equivalents and short-term investments of =P40.5 billion, consolidated net debt declined to =P9.5 billion from =P27.3 billion and consolidated net debt to equity ratio at 0.11 to 1 from 0.36 to 1. Equity attributable to equity holders of the parent by year-end reached =P86.9 billion, up 13% from the prior year. Altogether, these put consolidated net income in 2007 at =P16.3 billion, which was a 34% increase from the =P12.2 billion consolidated net income attributable to equity holders of the parent recorded in 2006 and the highest ever recorded by the company.

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The healthy earnings growth and strong cash position of the parent company enabled it to further increase its dividend payout in 2007 with a total of =P7.3 billion paid out to shareholders, more than double the amount the prior year. This is equivalent to 60% of prior year’s net income, inclusive of the 20% stock dividend, and a dividend yield of 1.4% based on an average price of =P558.50 per share. This combined with the 15.5% gain in the company’ stock price during the year put total return to shareholders at 17% in 2007. The company’s total market capitalization by year end reached =P234 billion and was ranked the second largest among companies listed in the Philippine Stock Exchange. However, collectively, the market capitalization of the five listed companies of the group accounted for about 27% of the Philippine Stock Exchange’s composite index’s total market capitalization.

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MMAANNAAGGEEMMEENNTT Board of Directors

Ayala’s Board has seven members, all of whom are elected by Ayala’s common stockholders at the stockholders’ annual meeting. The Directors hold office for one year and until their successors are elected and qualified in accordance with Ayala’s By-Laws. The Board regularly meets at least on a quarterly basis. It ensures the presence and adequacy of internal control mechanisms for good governance in accordance with the Company’s Manual of Corporate Governance. The minimum internal control mechanisms for the Board’s oversight responsibility include, but are not limited to: (a) Ensuring the presence of organizational and procedural controls, supported by an effective

management information system and risk management reporting system; (b) Reviewing conflict-of-interest situations and providing appropriate remedial measures for the same; (c) Appointing a CEO with the appropriate ability, integrity and experience to fill the role, as well as

defining the CEO’s duties and responsibilities; (d) Reviewing proposed senior management appointments; (e) Ensuring the selection, appointment and retention of qualified and competent management; reviewing

the Company’s personnel and human resources policies, compensation plan and the management succession plan;

(f) Institutionalizing the internal audit function; and (g) Ensuring the presence of, and regularly reviewing, the performance and quality of external audit. On May 18, 2009, the Securities and Exchange Commission (SEC) approved the amendment of the by-laws of the Company on the adoption of the SRC Rule 38 (Requirements on Nomination and Election of Independent Directors). The Company always undertakes to abide by SRC Rule 38 on the required number of independent directors subject to any revision that may be prescribed by the SEC. As of December 31, 2009 the composition of the Board was as follows: Board of Directors Jaime Augusto Zobel de Ayala Chairman and Chief Executive Officer Fernando Zobel de Ayala President and Chief Operating Officer Meneleo J. Carlos, Jr. Independent Director Nobuya Ichiki Director Delfin L. Lazaro Director Xavier P. Loinaz Independent Director Mercedita S. Nolledo Director

The write-ups below include positions currently held by the directors and executive officers, as well as positions held during the past five years. Jaime Augusto Zobel de Ayala , Filipino, 51, has served as Director of Ayala Corporation since 1987. He also holds the following positions: Chairman and CEO and Chairman of the Nomination Committee of Ayala Corporation; Chairman of the Board of Directors of Globe Telecom, Inc., Bank of the Philippine Islands and Integrated Micro-Electronics, Inc., Azalea Technology Investment, Inc., World Wildlife Fund Philippine Advisory Council, and AI North America; Vice Chairman of Ayala Land, Inc., Manila Water Co., Inc. and Asia Society Philippines Foundation, Inc.; Co-Vice Chairman of Mermac, Inc., Ayala Foundation, Inc. and Makati Business Club; Director of BPI PHILAM Life Assurance Corporation, Alabang Commercial Corporation, Ayala Hotels, Inc. He is a member of various international and local business and socio-

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civic organizations including the Children’s Hour Philippines, Inc., Asian Institute of Management, Asia Business Council, JP Morgan International Council, Mitsubishi Corporation International Advisory Committee, Toshiba International Advisory Group, Harvard Business School Asia-Pacific Advisory Board, Harvard University Asia Center Advisory Committee, The Asia Society, The Singapore Management University, the Conference Board, Pacific Basin Economic Council and Philippine Economic Society; Trustee of the Ramon Magsaysay Awards Foundation and the International Business Council of the World Economic Forum. He was a TOYM (Ten Outstanding Young Men) Awardee in 1999 and was named Management Man of the Year in 2006 by the Management Association of the Philippines for his important role in the transformation of Ayala Corporation into a highly diversified forward-looking conglomerate. He was also awarded the prestigious Harvard Business School Alumni Achievement Award in 2007. He graduated with B.A. in Economics (Cum Laude) at Harvard College in 1981 and took his MBA at the Harvard Graduate School of Business Administration in 1987. Fernando Zobel de Ayala , Filipino, 50, has served as Director of Ayala Corporation since 1994. He also holds the following positions: President and Chief Operating Officer of Ayala Corporation; Chairman of Ayala Land, Inc., Manila Water Company, Inc., Ayala Automotive Holdings Corp., Ayala DBS Holdings, Inc., Alabang Commercial Corp.; Vice Chairman of Aurora Properties, Inc., Azalea Technology Investments, Inc., Ceci Realty, Inc. and Vesta Property Holdings, Inc.; Co-Vice Chairman of Ayala Foundation, Inc. and Mermac, Inc.; Director of the Bank of the Philippine Islands, Globe Telecom, Inc., Integrated Micro-Electronics Inc., Asiacom Philippines, Inc., Ayala Hotels, Inc., AC International Finance Limited, Ayala International Pte. Ltd., and Caritas Manila; and Member of INSEAD, East Asia Council World Economic Forum, Habitat for Humanity International Asia-Pacific Steering Committee and Trustee of International Council of Shopping Centers. He graduated with B.A. Liberal Arts at Harvard College in 1982. Meneleo J. Carlos, Jr. , Filipino, 80, served as the Independent Director of Ayala Corporation since September 2002. He is the Chairman of Ayala Corporation’s Audit and Compensation Committees and a member of the Nomination Committee. He is the Chairman and President of Riverbanks Development Corporation; Chairman of Chem Insurance Brokers, Inc, AVC Chemicals, Inc., Philippine Iron Construction & Marine Works, Inc., and Vacphil Rubber Philppines, Inc.; President of Resins, Inc., RI Chemical Corporation, and Maja Development Corporation; and Director of Polymer Product, Inc., Philippine Iron Construction and Marine Works, Cagayan Electric Power and Light Co. and Philippine Technology Development Ventures, Inc. He graduated with a B.S. Chemical Engineering degree and a Certificate of Advanced Studies at Cornell University in 1952. Nobuya Ichiki, Japanese, 53, has served as Director of Ayala Corporation since June 2009. His other positions include: General Manager of Mitsubishi Corporation - Manila Branch; Chairman of International Elevator & Equipment Inc.; Chairman and President of MCPL (Philippines) Inc.; Director of Japanese Chamber of Commerce & Industry of the Philippines, The Japanese Association Manila, Inc., Isuzu Philippines Corporation, Imasen Philippines Manufacturing Corp., Kepco Ilijan Corporation, Team Diamond Holdings, UniCharm Philippines Inc., Robinsons Convenience Stores, Inc., Trans World Agro-Products Corp., Laguna Technopark Inc., West of Laguna Development Corporation and Seneca Holdings, Inc. He graduated with a B.S. Engineering degree in Urban Design at The University of Tokyo in 1979. Delfin L. Lazaro , Filipino, 64, has served as Director of Ayala Corporation since January 2007. He has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 1996. He also holds the following positions: Chairman of Philwater Holdings Co., Inc. and Atlas Fertilizer & Chemicals, Inc.; Chairman and President of Michigan Power, Inc., Purefoods International, Ltd., and A.C.S. T. Business Holdings, Inc.; Vice Chairman and President of Asiacom Philippines, Inc.; President of Azalea Technology Investments, Inc.; Director of Ayala Land, Inc., Globe Telecom, Inc., Integrated Micro-Electronics, Inc., Manila Water Co., Inc., AYC Holdings, Ltd., AI North America, Inc., AC International Holdings, Ltd., Ayala DBS Holdings, Inc., Ayala Automotive Holdings Corp., Probe Productions, Inc. and Empire Insurance Company. Formerly, Mr. Lazaro was the President and CEO of Benguet Corporation and Secretary of the Department of Energy of the Philippine government. He was named Management

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Man of the Year 1999 by the Management Association of the Philippines for his contribution to the conceptualization and implementation of the Philippine Energy Development Plan and to the passage of the law creating the Department of Energy. He was also cited for stabilizing the power situation that helped the country achieve successively high growth levels up to the Asian crisis in 1997. He graduated with BS Metallurgical Engineering at the University of the Philippines in 1967 and took his MBA (with Distinction) at Harvard Graduate School of Business in 1971. Xavier P. Loinaz , Filipino, 66, has served as the Independent Director of Ayala Corporation since April 2009. He was a member of the Management Committee of Ayala Corporation (Ayala Group) from 1989 to 2004. He was formerly the President of Bank of the Philippine Islands (BPI) from 1982 to 2004. His other significant positions include: Chairman of the Alay Kapwa Kilusan Pangkalusugan; Vice-Chairman of FGU Insurance Corporation; Independent Director of Bank of the Philippine Islands, BPI Capital Corporation, BPI Direct Savings Bank, Inc., BPI/MS Insurance Corporation, BPI Family Savings Bank, Inc. and Globe Telecom, Inc.; and Member of the Board of Trustees of BPI Foundation, Inc. and E. Zobel Foundation. He graduated with an AB Economics degree at Ateneo de Manila University in 1963 and took his MBA-Finance at Wharton School, University of Pennsylvania in 1965. Mercedita S. Nolledo, Filipino, 68, has served as Director of Ayala Corporation since 2004 and is also a Senior Managing Director and Corporate Secretary of Ayala Corporation, and a Senior Counsel of the Ayala Group of Companies. Her other significant positions include: Chairman of BPI Investment Management, Inc. and FEB Management, Inc., Director and Corporate Secretary of Ayala Land, Inc.; Director of Honda Cars Cebu, Inc., Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., Isuzu Cebu, Inc., Ayala Automotive Holdings Corp., HCMI Insurance Agency, Inc.; Bank of the Philippine Islands, BPI Family Savings Bank, BPI Capital Corp., and Anvaya Cove Beach and Nature Club, Inc.; Member of the Board of Trustees of Ayala Foundation, Inc. and BPI Foundation, Inc.; Treasurer of Phil. Tuberculosis Society, Inc., Sonoma Properties, Inc. and JMY Realty Development Corp. She had her education at the University of the Philippines and graduated Magna Cum Laude and Class Valedictorian in Bachelor of Science in Business Administration and Cum Laude and Class Valedictorian in Bachelor of Laws. Nominees to the Board of Directors for election at the stockholders’ meeting on April 16, 2010: All the above incumbent directors, except Mr. Meneleo J. Carlos, Jr. The nominees were formally nominated to the Nominations Committee of the Board (composed of Meneleo J. Carlos, Jr., Chairman, Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala) by a shareholder of the Company, Ms. Asuncion Lourdes de Jesus. Messrs. Ramon R. del Rosario, Jr. and Xavier P. Loinaz, an incumbent director, are being nominated as independent directors. Ms. de Jesus is not related to any of the nominees including Messrs. del Rosario and Loinaz. The nominees have served as directors of the Company for more than five years except for Messrs. Xavier P. Loinaz, Delfin L. Lazaro and Nobuya Ichiki who were elected to the Board in April 2006, January 2007 and June 2009, respectively. The nominees are expected to attend the scheduled annual stockholders’ meeting. Mr. Meneleo J. Carlos Jr., Filipino, 80, has served as independent director of the Company for eight years. In 2008, he agreed to serve for two final terms up to the 2010 annual stockholders meeting of the Company. For eight years, Mr. Carlos served the Company with exemplary dedication and the Company benefited from his insights and experience. Ramon R. del Rosario, Jr., Filipino, has been nominated as independent director for election at the 2010 annual stockholders’ meeting of the Company. Mr. del Rosario is a distinguished business and civic leader known for his probity, independence and clear and critical thinking. Ramon R. del Rosario, Jr. , Filipino, 65, is the President and Chief Executive Officer of Philippine Investment Management (PHINMA), Inc. He served as an Independent Director of Ayala Land, Inc. from 1994 to April 2009. His other significant positions are: President of Bacnotan Consolidated Industries, Inc. and Microtel Development Corp.; Chairman and CEO of AB Capital and Investment Corporation; Chairman of Paramount Building Management, United Pulp and Paper Co., Inc., Microtel Inns and Suites

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(Pilipinas), Inc., CIP II Power Corp., Trans-Asia Gold and Minerals Development Corp., Stock Transfer Services, Inc., Araullo University and Cagayan de Oro College; and Director of Trans-Asia Oil & Energy Development Corporation, Trans-Asia Power Generation Corp., PHINMA Property Holdings Corp., Roxas Holdings, Inc., Holcim (Phils.), Inc., Bacnotan Industrial Park Corp., PHINMA Foundation, Inc. and Union Galvasteel Corp. He served as the Philippines’ Secretary of Finance in 1992-1993. He is the current chairman of the Makati Business Club. He graduated with degrees in BSC-Accounting and AB-Social Sciences (Magna cum Laude) at De La Salle University, Manila in 1967 and earned his Masters in Business Administration at Harvard Business School in 1969. Executive Officers Ayala Group Management Committee Members / Senior L eadership Team

* Jaime Augusto Zobel de Ayala Chairman & Chief Executive Officer * Fernando Zobel de Ayala President & Chief Operating Officer * Delfin L. Lazaro Senior Managing Director, Chief Executive Officer of AC Capital

until December 31, 2009 * Mercedita S. Nolledo Senior Corporate Counsel & Corporate Secretary

** Gerardo C. Ablaza, Jr. Senior Managing Director, Chief Executive Officer of AC Capital effective January 1, 2010

** Antonino T. Aquino Senior Managing Director, President of Ayala Land, Inc. *** Jaime I. Ayala Senior Managing Director ** Charles H. Cosgrove President of AG Holdings, Ltd. ** Rufino Luis T. Manotok Senior Managing Director, Corporate Information Officer, Chief

Finance Officer & President of Ayala Automotive Holdings, Inc. ** Arthur R. Tan Senior Managing Director, President of Integrated Micro-

Electronics, Inc. ** Jose Rene D. Almendras Managing Director, President of Manila Water Company, Inc. ** Alfredo I. Ayala Managing Director, Chief Executive Officer of LiveIt Investments,

Ltd. ** Ernest Lawrence L. Cu President, Globe Telecom, Inc. ** John Eric T. Francia Managing Director, Group Head of Corporate Strategy ** Victoria P. Garchitorena Managing Director, President of Ayala Foundation, Inc. ** Solomon M. Hermosura Managing Director, General Counsel, Assistant Corporate

Secretary & Compliance Officer Ricardo N. Jacinto Managing Director Rufino F. Melo III Managing Director

** Aurelio R. Montinola III President, Bank of the Philippine Islands Ramon G. Opulencia Managing Director & Treasurer

** John Philip S. Orbeta Managing Director, Group Head of Corporate Resources * Members of the Board of Directors ** Management Committee members *** Retired effective December 31, 2009 The write-ups below include positions currently held by the executive officers as well as positions held during the past five years. Gerardo C. Ablaza, J r., Filipino, 56 has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 1998. He also holds the following positions: Senior Managing Director of Ayala Corporation; Co-Vice Chairman of Globe Telecom, Inc.; Director of Bank of the Philippine Islands, BPI Family Savings Bank, Inc., BPI Card Finance Corporation, Azalea Technology Investment, Inc., Asiacom Philippines, Inc., Manila Water Company, Inc., and Integrated Micro-Electronics, Inc. He is also the Chief Executive Officer of AC Capital with directorship position in HRMall Holdings Limited, LiveIT Investments Limited, Integreon, Inc., Affinity Express Holdings Limited, NewBridge International Investments Ltd., Stream Global Services., RETC (Renewable Energy Test Center). He was the President and Chief Executive Officer of Globe Telecom, Inc. from 1998 to April 2009. He was previously

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Vice President and Country Business Manager for the Philippines and Guam of Citibank, N.A. for its Global Consumer Banking business. Prior to this position, he was Vice President of Citibank, N.A. Singapore for Consumer Banking. Attendant to his last position in Citibank, N.A., he was the bank’s representative to the Board of Directors of CityTrust Banking Corporation and its various subsidiaries. He graduated Summa Cum Laude at De La Salle University in 1974 with a degree in AB Major in Mathematics (Honors Program). In 2004, he was recognized by CNBC as the Asia Business Leader of the Year, making him first Filipino CEO to win the award. In the same year, he was awarded by Telecom Asia as the Best Asian Telecom CEO. Antonino T. Aquino, Filipino, 62, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since August 1998. He also holds the following positions: Senior Managing Director of Ayala Corporation and President of Ayala Land, Inc. He also previously served as President of Manila Water Company, Inc., and Ayala Property Management Corporation, Senior Vice President of Ayala Land, Inc., and a Business Unit Manager in IBM Philippines, Inc. Currently, he is the Chairman of the Board of Trustees of the Hero Foundation; Member of the board of Manila Water Co., Inc. and of various corporate social responsibility foundations such as Ayala Foundation, Manila Water Foundation, Habitat for Humanities Philippines, La Mesa Watershed Foundation and Makati Environment Foundation. He also served as President of Manila Water Company, Inc, and Ayala Property Management Corporation; Senior Vice President of Ayala Land, Inc., and a Business Unit Manager of IBM Philippines, Inc. He was named “Co-Management Man of the Year 2009” by the Management Association of the Philippines for his leadership role in a very successful waterworks privatization and public-private sector partnership. He graduated with Bachelor of Science Major in Management at the Ateneo de Manila University in 1968 and has completed academic units for the Masteral Degree in Business Management at the Ateneo Graduate School of Business in 1975. Jaime I. Ayala , Filipino, 46, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) from 2004 to December 2009. He was a Senior Managing Director of Ayala Corporation and President and CEO of Ayala Land, Inc from 2004 to March 2009. His other significant positions were: Chairman and President of Makati Property Ventures, Inc.; Chairman of Ayala Property Management Corp., Cebu Holdings, Inc., Cebu Insular Hotel Co., Inc., Cebu Property Ventures & Dev't. Corp., Alveo Land Corp., Avida Land Corp., Laguna Technopark, Inc., Makati Development Corp., and Station Square East Commercial Corp; Director and President of Aurora Properties, Inc, Ayala Hotels, Inc., Enjay Hotels, Inc., Roxas Land Corp. and Vesta Property Holdings, Inc.; Director of Alabang Commercial Corp., Ayala Greenfield Development Corp., Ayala Infrastructure Ventures, Inc., Ayala Land Sales, Inc., Berkshire Holdings, Inc., Bonifacio Arts Foundation, Inc., Bonifacio Land Corp., Emerging City Holdings, Inc. and Fort Bonifacio Development Corp. He earned his M.B.A. from Harvard School, graduating with honors in 1988. He completed his undergraduate work in 1984 at Princeton University, where he graduated Magna Cum Laude in Economics, with a minor in Engineering. Charles H. Cosgrove, American, 54, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 1998. He is the CEO of AG Holdings Ltd. Prior to joining Ayala Corporation, he was a Managing Director of Singapore Telecom International Pte. Ltd. He graduated from Stanford University with an AB in 1977. He obtained a JD from Georgetown University School of Law in 1980. Rufino Luis T. Manotok , Filipino, 59, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 1999. He also holds the following positions: Senior Managing Director, Corporate Information Officer and Chief Finance Officer of Ayala Corporation; President and Chairman of Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., Isuzu Iloilo Corp., Prime Initiatives, Inc. and Water Capital Works, Inc.; Chairman of Honda Cars Cebu, Inc., Isuzu Cebu, Inc., Ayala Aviation Corporation, Darong Agricultural Development Corporation, and AYC Finance Ltd.; Vice Chairman of Michigan Power, Inc.; President and Director of Ayala Automotive Holdings Corp. and Philwater Holdings Company; and Director of AC International Finance Ltd., AG Holdings Limited, AI North America, Inc., Asiacom Philippines, Inc., AYC Holdings Ltd., Azalea International Venture Partners Ltd., Ayala Systems Technology, Inc., BPI Family Savings Bank, Inc., Bestfull Holdings Limited, Fine State Group Limited, IMA Landholdings, Inc. and Michigan Holdings, Inc. He graduated with Bachelor of Arts in Economics at the

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Ateneo de Manila University in 1971 and had his Masters Degree in Business Management at the Asian Institute of Management in 1973. He also took the Advance Management Program at Harvard Business School in 1994. Arthur R. Tan , Filipino, 50, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) for more than 5 years. He holds the position of Senior Managing Director of Ayala Corporation. He is also the President and CEO of Integrated Micro-Electronics, Inc. and Speedy-Tech Electronics, Ltd.; Chairman of Speedy-Tech Philippines, Inc. and Advanced Research and Competency Development Institute (ARCDI); and Vice Chairman of Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI). He is also the President of IMI USA, Inc. and IMI International Singapore Pte. Ltd. Prior to joining Ayala Corporation, he was a Managing Director of American Microsystems, Inc. (Asia Pacific Region/Japan). He graduated with a degree of BS in Electronics and Communication Engineering at the Mapua Institute of Technology in 1982. He has taken post graduate classes in MSEE from the University of Idaho and business courses from Harvard University. Jose Rene D. Almendras , Filipino, 49, is a Managing Director of Ayala Corporation since January 2007. He is the Chief Executive Officer of Manila Water Co., Inc. He was previously connected with Ayala Land, Inc. as a member of the Management Committee and concurrently Head of the Visayas Mindanao Business and Operations Transformation Group. He was President and CEO of Cebu Holdings, Inc. and Cebu Property Ventures and Development Corp., both publicly listed companies managed by the Ayala Land Group. He served as Chairman of the Ayala Land Group Bidding Committee and head of its Strategic Procurement Division. Prior to joining the Ayala Group, Mr. Almendras served as Treasurer for both Aboitiz & Company, and the publicly listed Aboitiz Equity Ventures. While at the Aboitiz Group, he was appointed President and CEO of City Savings Bank, also owned by the Aboitiz Group. He also worked in various capacities with Citytrust Banking Corporation, Citibank, and the Bank of the Philippine Islands. He obtained his Business Management degree from the Ateneo de Manila University and completed the Strategic Business Economics Program at the University of Asia and the Pacific. Alfredo I. Ayala , Filipino, 48, is a Managing Director of Ayala Corporation since June 2006. He is the Chief Executive Officer of LiveIt Investments, Ltd., the holding company of Ayala Corporation for its investments in the BPO sector. Currently, he holds the following positions: Chairman of the Business Processing Association of the Philippines (BPA/P) and Stream Global Solutions, Inc. Director of NewBridge International Investment Limited, Affinity Express Holdings Limited and HRMall Holdings Limited. Previously, he was a Chairman of SPi, one of the leading non-voice BPO companies in Asia and Partner at Crimson Investment, an international private equity firm. Prior to that, he was a Managing Director and co-Founder of MBO Partners. He has an MBA from the Harvard Graduate School of Business Administration and BA in Development Studies and Economics, graduated with Honors, from Brown University. Ernest Lawrence L. Cu , Filipino, 49, is a member of the Management Committee of Ayala Corporation (Ayala Group) since January 2009. He is the President and Chief Executive Officer of Globe Telecom, Inc. He is also a Director of Systems Technology Institute, Inc., Prople BPO, Inc., ATR KimEng Capital Partners, Inc., ATR KimEng Financial Corporation, Game Services Group. He is a Trustee of Ayala Foundation, Inc. and De La Salle College of St. Benilde. He brings with him over two decades of general management and business development experience spanning multi country operations. Prior to joining Globe, he was the President and CEO of SPI Technologies, Inc. He also served as Director of Digital Media Exchange, Inc. and a Trustee of the International School Manila. He has a Bachelor of Science degree in Industrial Management Engineering from De La Salle University in Manila and an M.B.A. from the J.L. Kellogg Graduate School of Management, Northwestern University. John Eric T. Francia, Filipino, 38, is a Managing Director and a member of the Management Committee of Ayala Corporation since January 2009. Mr. Francia is the Head of Ayala’s Corporate Strategy Group, which is responsible for overseeing Ayala’s portfolio strategy, providing analytic support for resource allocation decisions, and aligning and monitoring key performance metrics within the group. He is also a director of Integreon, and Michigan Power, Inc. Prior to joining Ayala, he was the Head of the Global Business Planning and Operations of the Monitor Group, a strategy consulting firm based in Cambridge,

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MA. He spent 12 years in the management consulting sector both as a senior consultant and member of the management team. Prior to consulting, he spent a few years in the field of academe and media. He received his undergraduate degree in Humanities and Political Economy from the University of Asia & the Pacific, graduating Magna Cum Laude. He then completed his Masters Degree in Management Studies at the University of Cambridge in the UK, graduating with First Class Honors. Victoria P. Garchitorena , Filipino, 65, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 2006. She is currently a Managing Director of Ayala Corporation since 1996, President and Board member of Ayala Foundation, Inc. and Ayala Foundation USA. Her other significant positions include: Trustee of the International Center on Innovation, Transformation and Excellence in Governance and Pinoy Me Foundation; member of the Asia Pacific Advisory Council Against Corruption-World Bank, League of Corporate Foundations and Makati Business Club; and member of the National Committee of Bishops-Businessmen’s Council for Human Development. Previously, she was a Senior Consultant on Poverty Alleviation and Good Governance and the Head of the Presidential Management Staff and Secretary to the Cabinet under the Office of the President of the Republic of the Philippines; a Director of Philippine Charity Sweepstakes Office; Executive Assistant to the Chairman and President of the Meralco Foundation, Inc.; a Trustee of the Ramon Magsaysay Awards Foundation; and Co-Chairperson of EDSA People Power Commission; a Board member of the US based Council of Foundations; Member of the Global Foundation Leaders Advisory Group of World Economic Forum and Governor of Management Association of the Philippines. She graduated with a B.S. Physics degree (Summa Cum Laude) at the College of the Holy Spirit in 1964 and was an SGV scholar at the Asian Institute of Management. Solomon M. Hermosura , Filipino, 47, has served as Managing Director of Ayala Corporation since January 1999 and a member of the Management Committee of Ayala Corporation (Holding Company) since January 2009. He is also the General Counsel, Compliance Officer, and Assistant Corporate Secretary of Ayala Corporation. He serves as Corporate Secretary or Assistant Corporate Secretary of various companies in the Ayala Group, including the following: Corporate Secretary: Manila Water Company, Inc.; Integrated Micro-Electronics, Inc.; Ayala Foundation, Inc.; Ayala DBS Holdings, Inc.; Asiacom Phils., Inc.; Philwater Holdings Company, Inc.; AC International Finance Ltd.; AYC Finance Ltd.; Affinity Express Holdings, Inc.; and Integreon, Inc.; Assistant Corporate Secretary: Ayala Land Inc. He also serves as a member of the Board of Directors of a number of companies in the Ayala Group. He earned his Bachelor of Laws degree from San Beda College in 1986 and placed 3rd in the 1986 Bar Examination. Ricardo N. Jacinto, Filipino, 49, has served as a Managing Director of Ayala Corporation since May 2000. He is the Head of AC Capital Portfolio B. His other significant positions are: President of Nicanor P. Jacinto, Jr. Foundation and a Director of UP School of Economics Alumni Association, Ayala Automotive Holdings Corporation, Ayala Hotels, Inc., Technopark Land, Inc., PFC Properties, Inc., PFN Holdings Corporation, Ayala Aviation Corp., and Michigan Holdings, Inc. He was a Director of Integreon, Inc., Integreon Managed Solutions (Philippines), Inc., Integreon Managed Solutions (India), Private Limited and LiveIt Solutions, Inc.. He completed his Masters in Business Administration at the Harvard University in 1986. Rufino F. Melo III , Filipino, 56, has served as a Managing Director of Ayala Corporation since 2006. He is the Head of the Strategic Management Control of Ayala. He is a Director of Darong Agricultural Corporation and Pameka Holdings, Inc. Prior to joining Ayala, he was the Group Financial Comptroller of Jardine Davies, Inc. He graduated with a BS Accountancy degree at the University of the East in 1975. Aurelio R. Montinola III , Filipino, 58, has served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 2005. He also holds the following positions: President and Chief Executive Officer of the Bank of the Philippine Islands; Chairman of Board of Directors of BPI Direct Savings Bank, Inc., BPI Computer Systems Corporation, BPI/MS Insurance Corporation, BPI Europe Plc., East Asia Computer Center, Inc., LGU Guarantee Corp., Monti-Rey, Inc., Desrey, Inc., Seyrel Investment & Realty Corp., Armon Realty, Dercc, Inc., and Amon Trading Corp.; Co-Chairman of the Philippine-France Business Council; Vice-Chairman and President of BPI Foundation, Inc.; Vice Chairman of the

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Board of Directors of Republic Cement Corporation; Vice Chairman of the Board of Trustees of Far Eastern University and Philippine Business for Education, Inc.; Regional Vice Chairman of MasterCard Incorporated; Director of BPI-Philam Life Assurance Corporation, BPI Bancassurance, Inc., BPI Capital Corporation, BPI Family Savings Bank, Mere, Inc., and Western Resources Corp. He is the Chairman of the Board of Trustee of East Asia Computer Educational Foundation; Trustee of the Ayala Foundation, Inc., International School Manila and Pres. Manuel A. Roxas Foundation. He is the President of the Bankers Association of the Philippines and Member of the Makati Business Club and Management Association of the Philippines. He graduated with a degree in BS Management Engineering at the Ateneo de Manila University in 1973 and received his MBA at Harvard Business School in 1977. Ramon G. Opulencia , Filipino, 53, has served as Treasurer of Ayala Corporation since September 2005 and has previously served as the Senior Assistant Treasurer from November 1992 to September 2005. He is also a Managing Director of Ayala Corporation. He is currently a member of the Board of Directors of BPI Family Savings Bank, Inc., AYC Holdings Limited and AYC Finance Limited. Prior to joining Ayala Corporation, he was a Senior Manager of the Bank of the Philippine Islands’ Treasury Group. He graduated with a BS in Mechanical Engineering degree at the De La Salle University in 1978 and took his Masteral in Business Management at the Asian Institute of Management graduating with Distinction in 1983. He completed the Advanced Management Program at the Harvard Business School in May 2005. John Philip S. Orbeta , Filipino, 48, has served as a member of the Ayala Corporation Management Committee since 2005 and the Group Management Committee since 2009. He is currently the Managing Director and Group Head for Corporate Resources, covering Strategic Human Resources, Corporate Communications and Information & Communications Technology at Ayala Corporation. He is the President of HRMall, Inc., the Ayala group’s HR Business Process Outsourcing company. He is concurrently the Chairman of the following councils at the Ayala Group: Human Resources Council, Corporate Security Council, the Ayala Business Clubs and is the Program Director of the Ayala Young Leaders Congress. Prior to joining Ayala Corporation, he spent 19 years at Watson Wyatt Worldwide (NYSE:WW), the global management consulting firm where he was the Vice President and Global Practice Director for the firm's Human Capital Consulting Group, overseeing the firm's practices in executive compensation, strategic rewards, data services and organization effectiveness around the world. He was also a member of Watson Wyatt's Board of Directors. He received his undergraduate degree in Economics from the Ateneo de Manila University where he also attended graduate studies in Industrial Psychology. He completed a Leadership Development Program at the Harvard Business School. Change in Management Roles effective April 16, 2010 Its deep bench of senior executives allows Ayala to constantly provide its executives with new challenges and opportunities while enabling its operating companies to continue on their trajectory of performance. Consistent with this, Mr. Rufino Luis T. Manotok will end his 4-year tenure as Chief Finance Officer (CFO) to focus on the automotive dealership business of the Company where Mr. Manotok has also played a lead role for years. Mr. Manotok will take on the role of Chairman & CEO of the Ayala Automotive Holdings Corporation concurrently with his positions as President & Chairman of Honda Cars Makati, Inc., Isuzu Automotive Dealership Inc. and Isuzu Iloilo Corporation and Chairman of Honda Cars Cebu Inc. and Isuzu Cebu Inc. To take the place of Mr. Manotok as CFO is Mr. Delfin Gonzalez Jr., who has been Managing Director of the Company since November 2000. Mr. Gonzalez, Filipino, 60, will return to the Company from his secondment to Globe, where he is presently the Chief Finance Officer & Treasurer. Mr. Gonzalez will retire from his positions in Globe effective April 13, 2010 and will be elected as CFO of the Company at the organizational meeting of the Board of Directors on April 16, 2010. Before joining the Ayala Group, Mr. Gonzalez worked with San Miguel Corporation, first with the Strategic Planning and Finance Group and then as Executive Vice President, CFO and Treasurer until 1999.

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Significant Employees The Company considers all its employees together as one work force as significant. Everyone is expected to work as part of one team to achieve the Company’s goals and objectives. Family Relationship Jaime Augusto Zobel de Ayala, Chairman/Chief Executive Officer, and Fernando Zobel de Ayala, President/Chief Operating Officer, are brothers. Jaime I. Ayala, Senior Managing Director until his resignation effective December 31, 2009, and Alfredo I. Ayala, Managing Director, are also brothers. There are no known family relationships between the current members of the Board and key officers other than the above. Involvement in Certain Legal Proceedings To the best of Ayala's knowledge, there has been no occurrence of any of the following events since its incorporation which are material to an evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, or control person of Ayala: (a) Any insolvency or bankruptcy petition filed by or against any business of which such person was a

general partner or executive officer either at the time of the insolvency or within two years prior to that time;

(b) Any conviction by final judgment in a criminal proceeding, domestic or foreign, or any pending

criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses; (c) Any final and executory order, judgment, or decree of any court of competent jurisdiction, domestic or

foreign, permanently or temporarily enjoining, barring, suspending, or otherwise limiting involvement in any type of business, securities, commodities, or banking activities; and

(d) Any final and executory judgment by a domestic or foreign court of competent jurisdiction (in a civil

action), the SEC, or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self-regulatory organization, for violation of a securities or commodities law.

Compensation of Directors and Officers

Directors

Article IV, Section 21 of Ayala’s By-Laws provides: “Section 21 - The members of the Board of Directors of the Corporation who are neither officers nor consultants of the Corporation shall be entitled to a director’s fee in an amount to be fixed by the stockholders at a regular or special meeting duly called for the purpose.”

During the Annual Stockholders’ Meeting held on April 4, 2003, the stockholders ratified the resolution fixing the remuneration of non-executive directors at =P1,000,000.00 per year, consisting of the following components:

Retainer Fee: =P500,000.00 Per diem per Board meeting attended: =P100,000.00

In addition, a non-executive Director is entitled to a per diem of =P20,000.00 per Board committee meeting

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actually attended.

Name and principal position Year Salary Other incom e* Jaime Augusto Zobel de Ayala Chairman and CEO

Fernando Zobel de Ayala President and COO

Gerardo C. Ablaza, Jr. Senior Managing Director

Jaime I. Ayala Senior Managing Director

Delfin L. Lazaro Senior Managing Director

Rufino Luis T. Manotok Senior Managing Director, Corporate Information Officer & Chief Finance Officer

Ramon G. Opulencia Managing Director & Treasurer

Alfredo I. Ayala Managing Director

John Eric T. Francia Managing Director

Solomon M. Hermosura Managing Director

Ricardo N. Jacinto Managing Director

Rufino F. Melo III Managing Director

John Philip S. Orbeta Managing Director

Actual 2008 (restated)

=P197.8 M =P72.6 M

Actual 2009 =P202.9 M =P80.4 M

CEO & 12 most highly compensated executive officers

Projected 2010 =P226.8 M =P99.0 M

Actual 2008 (restated)

=P285.6 M =P109.3 M

Actual 2009 =P305.3 M =P133.8 M

All other officers** as a group unnamed

Projected 2010 =P330.8 M =P145.3 M * Composed of guaranteed and performance bonus provision ** Managers and up (including all above-named officers)

The total annual compensation includes basic pay and other taxable income (guaranteed bonus, performance-based incentive and exercise of stock options). The Company has no other arrangement with regard to the remuneration of its existing directors and officers aside from the compensation received as herein stated. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Pursuant to Ayala’s By-Laws, each Director has a term of office of one year from date of election or until his successor shall have been named, qualified, and elected. Each Executive Officer has an employment

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contract with Ayala for an indefinite period, the terms and conditions of which are in accordance with existing laws. The executive officers are entitled to receive retirement benefits in accordance with the terms and conditions of Ayala’s Bureau of Internal Revenue (“BIR”)-registered employees’ retirement plan. There is no plan or arrangement by which the Executive Officers will receive from Ayala any form of compensation in case of a change-in-control of Ayala or a change in the officers’ responsibilities following such change-in-control. WARRANTS AND OPTIONS OUTSTANDING The Company offered the Executive Stock Option Plan (ESOP) to the Company’s officers since 1995. The following are the outstanding options held by the above named officers:

Name Options granted

Options outstanding

Grant date Exercise price

Market Price on date of

grant* 640,965 103,466 May 8, 2001 171.88 190.98 588,561 197,654 June 18, 2002 140.97 156.63 937,164 423,520 June 6, 2003 107.29 119.21 767,016 529,629 June 10, 2004 152.78 169.76

All above-named officers

45,403 45,403 May 1, 2005 204.86 227.62 * Grossed up exercise price for the 10% discount The options expire ten years from grant date. Of the above named officers, no one exercised any option in 2009. The Company has adjusted the exercise price and market price of the options awarded to the above named officers due to the stock dividend declared by the Company in May 2004, June 2007 and May 2008 and to the reverse stock split in May 2005.

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Management and Certain Security Holders

Security Ownership of Certain Record and Beneficial Owners and Management

Security Ownership of Certain Record and Beneficial Owners (of more than 5%) as of February 28, 2010.

Title of class

Name and address of record owner and relationship with Issuer

Name of beneficial owner and relationship with record owner

Citizenship No. of shares held

Percent (of the outstanding common shares)

Common Mermac, Inc.1 35/F Tower One, Ayala Triangle, Ayala Ave., Makati City Stockholder

Mermac, Inc.2 Filipino 253,074,330 50.92%

Common PCD Nominee Corporation (Non-Filipino)3

G/F MSE Bldg. Ayala Ave., Makati City

Hongkong and Shanghai Banking Corporation (HSBC) and Standard Chartered Bank (SCB)4

Various 116,887,599 23.52%

Common Mitsubishi Corporation5

52/F PBCom Tower, 6794 Ayala Ave. cor. VA Rufino St., Makati City Stockholder

Mitsubishi Corporation6

Japanese 52,564,617 10.58%

Common PCD Nominee Corporation (Filipino)3

G/F MSE Bldg. Ayala Ave., Makati City

Hongkong and Shanghai Banking Corporation (HSBC) and Standard Chartered Bank (SCB)4

Filipino 39,717,926 7.99%

1 The Co-Vice Chairmen of Mermac, Inc. (“Mermac”), Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, are the Chairman/CEO and President/COO of the Company, respectively. 2 The Board of Directors of Mermac has the power to decide how Mermac shares in Ayala are to be voted. 3 The PCD is not related to the Company. 4 HSBC and SCB are participants of PCD. The 46,282,607 and 42,223,627 shares owned by HSBC and SCB, respectively, form part of the 156,605,525 shares registered in the name of PCD Non-Filipino and Filipino. The clients of HSBC and SCB have the power to decide how their shares are to be voted. There are no holders of more than 5% of the Company’s shares under HSBC and SCB. 5 Mitsubishi Corporation (“Mitsubishi”) is not related to the Company. 6 The Board of Directors of Mitsubishi has the power to decide how Mitsubishi’s shares in Ayala are to be voted.

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Security Ownership of Directors and Management as of February 28, 2010

Name of beneficial owner Amount and nature of bene ficial

ownership Citizenship Percent of

all class Directors Common Jaime Augusto Zobel de Ayala 858,933 (direct & indirect) Filipino 0.15113% Common Fernando Zobel de Ayala 872,804 (direct & indirect) Filipino 0.15357% Common Meneleo J. Carlos, Jr. 1 (direct) Filipino 0.00000% Common Nobuya Ichiki 1 (direct) Japanese 0.00000% Common Delfin L. Lazaro 427,308 (direct & indirect) Filipino 0.07519% Common Xavier P. Loinaz 105,513 (direct) Filipino 0.01853% Common 136,907 (direct & indirect) 0.02409% Preferred “A”

Mercedita S. Nolledo 20,000 (direct)

Filipino 0.00352%

Nominee to the Board of Directors Common Ramon R. del Rosario, Jr. 1 (direct) Filipino 0.00000% CEO and most highly compensated officers Common Jaime Augusto Zobel de Ayala 858,933 (direct & indirect) Filipino 0.15113% Common Fernando Zobel de Ayala 872,804 (direct & indirect) Filipino 0.15357% Common 234,906 (direct & indirect) 0.04133% Preferred “A”

Gerardo C. Ablaza, Jr. 4,000 (direct)

Filipino 0.00070%

Common Jaime I. Ayala 20,512 (indirect) Filipino 0.00361% Common Delfin L. Lazaro 427,308 (direct & indirect) Filipino 0.07519% Common 224,533 (direct & indirect) 0.03951% Preferred “A” 8,030 (indirect) 0.00141% Preferred “B”

Rufino Luis T. Manotok 50,000 (indirect)

Filipino 0.00880%

Common 203,166 (direct & indirect) 0.03575% Preferred “A”

Ramon G. Opulencia 16,000 (direct)

Filipino 0.00282%

Common Alfredo I. Ayala 91,300 (direct & indirect) Filipino 0.01606% Common John Eric T. Francia 30,534 (indirect) Filipino 0.00537% Common Solomon M. Hermosura 145,807 (direct & indirect) Filipino 0.02566% Common 28,629 (direct & indirect) 0.00504% Preferred “B”

Ricardo N. Jacinto 59,050 (direct)

Filipino 0.01039%

Common 90,730 (direct & indirect) 0.01596% Preferred “A”

Rufino F. Melo III 12,000 (direct)

Filipino 0.00211%

Common John Philip S. Orbeta 254,067 (direct & indirect) Filipino 0.04470% Other executive officers (Ayala group ManCom members) Common Jose Rene D. Almendras 9,000 (indirect) Filipino 0.00159% Common 113,908 (direct & indirect) 0.02004% Preferred “A”

Antonino T. Aquino 24,200 (direct)

Filipino 0.00426%

Common Charles H. Cosgrove 0 American 0.00000% Common Ernest Lawrence L. Cu 0 Filipino 0.00000% Common Victoria P. Garchitorena 112,652 (direct & indirect) Filipino 0.01982% Common Aurelio R. Montinola III 0 Filipino 0.00000% Common Arthur R. Tan 217,802 (direct & indirect) Filipino 0.03832% All Directors and Officers as a group 4,372,294 0.76774% None of the members of Ayala’s directors and management owns 2% or more of Ayala’s outstanding capital stock. VOTING TRUST HOLDERS OF 5% OR MORE Ayala knows of no person holding more than 5% of common shares under a voting trust or similar agreement.

152

MMAATTTTEERRSS AAFFFFEECCTTIINNGG LLIIQQUUIIDDIITTYY AANNDD CCAAPPIITTAALL EEXXPPEENNDDIITTUURREE As regards internal and external sources of liquidity, funding will be sourced from internally generated cash flows, and also from borrowings or available credit facilities from other local and international commercial banks, including an affiliated bank. There is no material commitment for capital expenditures other than those performed in the ordinary course of trade or business. There is no significant element of income not arising from continuing operations. There have not been any seasonal aspects that had a material effect on the financial condition or results of Ayala’s operations. Changes in, and Disagreements with, Accountants on Accounting and Financial Disclosure The Company has engaged the services of SGV & Co. during the two most recent fiscal years. There are no disagreements with SGV & Co. on accounting and financial disclosure.

153

NNAAMMEEDD EEXXPPEERRTTSS AANNDD CCOOUUNNSSEELL INDEPENDENT AUDITORS The Company’s independent auditors are SyCip Gorres Velayo & Co. (“SGV & Co.”), a member firm of Ernst & Young Global Limited. The Company’s consolidated financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009, included in this Prospectus, is audited by SGV & Co. in accordance with Philippine Standards on Auditing as set forth in their report thereon. In 2009, Ayala Corporation paid SGV & Co. audit and audit-related fees of approximately =P3.02 million and other fees amounting to approximately =P1.95 million. In 2008, Ayala Corporation paid SGV & Co. audit and audit-related fees of approximately =P3.02 million and other fees amounting to approximately =P5.29 million. In 2009, SGV & Co. billed the Company for an aggregate fee of =P1.95 M for the following services: (i) Completion of the Enterprise-Wide Risk Management study, (ii) Performance of due diligence work related to possible investment and (iii) Conduct of seminar on major differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles In 2008, SGV & Co. billed the Company for an aggregate fee of =P5.29 M for the following services: (i) Review of the Company’s consolidated financial statements for the period ended June 30, 2008 and issuance of a comfort letter in connection with the Company’s issuance of preferred shares, (ii) Conduct of an Enterprise-Wide Risk Management study and (iii) Conduct of a seminar on new accounting standards The Company’s Audit and Risk Committee recommended the appointment of SGV & Co. as the Company’s external auditor and its engagement for the other services described above to the Ayala Board. The Board approved the recommendation. Ayala’s stockholders subsequently ratified the Board’s approval. SGV & Co. has no shareholdings in the Company nor any right, whether legally enforceable or not, to nominate persons or to subscribe for the securities in the Company. SGV & Co. will not receive any direct or indirect interest in the Company or in any securities thereof (including options, warrants or rights thereto) pursuant to or in connection with the Offer. The foregoing is in accordance with the Code of Ethics for the Professional Accountants in the Philippines (which is based on the International Code of Ethics for Professional Accountants developed by the International Federation of Accountants) set by the Board of Accountancy and approved by the Professional Regulation Commission. LEGAL MATTERS Ayala Group Legal reviewed certain legal and tax matters in respect of the Offer for the Company. Romulo Mabanta Buenaventura Sayoc & De Los Angeles provided advise upon certain legal matters in respect of the Offer for the Joint Lead Underwriters. None of SGV & Co. or Romulo Mabanta Buenaventura Sayoc & De Los Angeles has any direct or indirect interest in the Company arising from the Offer.

154

TTAAXXAATTIIOONN

The following is a discussion of certain Philippine tax consequences of the acquisition, ownership and disposition of the Bonds. This does not purport to be a comprehensive description of the Philippine tax aspects in respect of the Bonds and no information is provided regarding the tax aspects of acquiring, owning, holding or disposing of the Bonds under tax laws of other jurisdictions and any specific resulting Philippine tax consequences thereof. The tax treatment of a holder of Bonds may vary depending upon such holder’s particular situation, and certain holders may be subject to special rules not discussed below. This discussion is based upon Philippine laws, regulations, rulings, and tax treaties in effect at the date of this Prospectus. PROSPECTIVE PURCHASERS OF THE BONDS ARE URGED TO CO NSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF T HE OWNERSHIP AND DISPOSITION OF A BOND, INCLUDING THE APPLICABILITY AND EFFECT OF ANY LOCAL OR FOREIGN TAX LAWS. As used in this section, the term “resident alien” refers to an individual whose residence is within the Philippines and who is not a citizen thereof; a “non-resident alien” is an individual whose residence is not within the Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a “non-resident alien doing business in the Philippines,” otherwise, such non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year is considered a “non-resident alien not doing business in the Philippines.” A “resident foreign corporation” is a non-Philippine corporation engaged in trade or business within the Philippines; and a “non-resident foreign corporation” is a non-Philippine corporation not engaged in trade or business within the Philippines. TAXATION OF INTEREST The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine-sourced income subject to Philippine income tax. Interest income derived by Philippine resident individuals from the Bonds is thus subject to income tax, which is withheld at source, generally at the rate of 20%. In addition, interest on the Bonds received by non-resident foreign individuals engaged in trade or business in the Philippines is also generally subject to a 20% withholding tax while such interest received by non-resident foreign individuals not engaged in trade or business is taxed at the rate of 25%. Interest income received by domestic corporations and resident foreign corporations is taxed at the rate of 20%. Interest income received by non-resident foreign corporations is subject to a 30% final withholding tax. The tax withheld constitutes a final settlement of Philippine income tax liability with respect to such interest. The foregoing rates are subject to further reduction by any applicable tax treaties in force between the Philippines and the country of residence of the non-resident Bondholder. Most tax treaties to which the Philippines is a party generally provide for a reduced tax rate of 15% in cases where the interest arises in the Philippines and is paid to a resident of the other contracting state. However, most tax treaties also provide that reduced withholding tax rates shall not apply if, among others, the recipient of the interest, who is a resident of the other contracting state, carries on business in the Philippines through a permanent establishment and the holding of the relevant interest-bearing instrument is effectively connected with such permanent establishment. Availing of such reduced tax treaty rates will require a confirmation of entitlement thereto from the BIR, as discussed below. TAX-EXEMPT OR TAX-REDUCED STATUS Bondholders who are exempt from or are not subject to final withholding tax on interest income may claim such exemption by submitting the prescribed proof thereof to the Registrar, or to the Underwriters or selling agents (together with their completed Application to Purchase) who shall then forward the same to

Taxation

155

the Registrar. These include: (i) certified true copy of the tax exemption certificate issued by the Bureau of Internal Revenue; (ii) a duly notarized undertaking, in the prescribed form, declaring and warranting its tax-exempt status, undertaking to immediately notify Ayala and its agents of any suspension or revocation of the tax exemption certificate and agreeing to indemnify and hold Ayala and its agents free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax based on the representation of the Bondholder; and (iii) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities. Bondholders may transfer their Bonds at anytime, regardless of tax status of the transferor vis-à-vis the transferee. Should a transfer between Bondholders of different tax status occur on a day which is not an Interest Payment Date, tax exempt entities trading with non tax exempt entities shall be treated as non-tax exempt entities for the interest period within which such transfer occurred. A selling or purchasing Bondholder claiming tax-exempt status is required to submit the following documents to Ayala no later than three (3) Business Days from Record Date: (i) a written notification of the sale or purchase, including the tax status of the selling or buying party, and (ii) an indemnity agreement wherein the new Bondholder undertakes to indemnify Ayala for any tax or change in tax status that may later on be assessed from Ayala on account of such transfer or change in tax status. VALUE-ADDED TAX Gross receipts arising from the sale of the Bonds in the Philippines by Philippine-registered dealers in securities and lending investors are subject to 12% value-added tax. The term “gross receipt” means gross selling price less the acquisition cost of the Bonds sold. GROSS RECEIPTS TAX Bank and non-bank financial intermediaries are subject to gross receipts tax on gross receipts derived from sources within the Philippines in accordance with the following schedule: On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived:

Maturity period is five years or less 5% Maturity period is more than five years 1% In case the maturity period in respect of the Bonds referred above is shortened as a result of the exercise of the Put Option, or if the Bonds are otherwise redeemed by Ayala pursuant to the Terms and Conditions, then the maturity period shall be reckoned to end as of the date of the Put Option or the redemption as applicable for purposes of classifying the transaction and the correct rate shall be applied accordingly. Insofar as exercise of the Put Option is concerned, the remaining maturity of the Bonds on the Put Option Date would be less than five years and thus the 5% rate would be applicable from after the second year following the Issue Date. Net trading gains realized within the taxable year on the sale or disposition of the Bonds shall be taxed at 7%. DOCUMENTARY STAMP TAX A documentary stamp tax is imposed upon the issuance of debentures and certificates of indebtedness issued by Philippine companies, such as the Bonds, at the rate of =P1.00 for each =P200, or fractional part thereof, of the offer price of such debt instruments; provided that, for debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to 365 days. The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted, or transferred, when the obligation or right arises from Philippine sources, or the property is situated in the

Taxation

156

Philippines. Ayala has agreed to pay all documentary stamp taxes on the original issue of the Bonds within the period prescribed by law. No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds. TAXATION ON SALE OR OTHER DISPOSITION OF THE BONDS Income Tax A Bondholder will recognize a gain or loss on the sale or other disposition (including the exercise of the Put Option or upon a redemption by Ayala as allowed under the Terms and Conditions) of the Bonds in an amount equal to the difference between the amount realized from such disposition and such Bondholder’s acquisition cost. Such gain or loss is likely to be deemed a capital gain or loss assuming that the Bondholder has recorded its Bonds as a capital asset. Under the Tax Code, any gain realized from the sale, exchange or retirement of securities, debentures and other certificates of indebtedness with an original maturity date of more than five years (as measured from the date of issuance of such securities, debentures or other certificates of indebtedness) shall not be subject to income tax. As the Bonds have a maturity of seven years, any gains realized by a Bondholder on the trading of the Bonds shall be exempt from income tax. An exercise by a Bondholder of the Put Option in 2015 or a redemption by Ayala as allowed under the Terms and Conditions would be each considered a sale for purposes of such tax. However, given that the amount to be received by the Bondholder in each case is limited to par value plus accrued but unpaid interest, there should be no income tax due on exercise of the Put Option or such redemption, provided that the Bondholder’s acquisition cost is not lower than par value of the Bonds. In case of an individual taxpayer, only 50% of the capital gain or loss is recognized upon the sale or exchange of a capital asset if it has been held for more than 12 months. Estate and Donor’s Tax The transfer by a deceased person, whether a Philippine resident or non-Philippine resident, to his heirs of the Bonds shall be subject to an estate tax which is levied on the net estate of the deceased at progressive rates ranging from 5% to 20%, if the net estate is over =P200,000. A Bondholder shall be subject to donor’s tax on the transfer of the Bonds by gift at either (i) 30%, where the donee or beneficiary is a stranger, or (ii) at progressive rates ranging from 2% to 15% if the net gifts made during the calendar year exceed =P100,000 and where the donee or beneficiary is other than a stranger. For this purpose, a “stranger” is a person who is not a: (a) brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth degree of relationship. The estate tax and the donor’s tax, in respect of the Bonds, shall not be collected (a) if the deceased, at the time of death, or the donor, at the time of the donation, was a citizen and resident of a foreign country which, at the time of his death or donation, did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) if the laws of the foreign country of which the deceased or donor was a citizen and resident, at the time of his death or donation, allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in the foreign country.

FINANCIAL INFORMATION The following pages set forth Ayala Corporation’s audited consolidated financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009.

72 AYALA CORPORATION72 Ayala Corporation

Statement of Management’s Responsibility for Financial Statements

The management of Ayala Corporation is responsible for all information and representations contained in the consolidated statements of financial position as at December 31, 2009 and 2008, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2009, and the summary of significant accounting policies and other explanatory notes. The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the Company’s Audit Committee and to its external auditor: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process, and report financial data; (ii) material weaknesses in the internal controls, and (iii) any fraud that involves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the consolidated financial statements before such statements are approved and submitted to the stockholders of the Company.

SyCip Gorres Velayo & Co., the independent auditors appointed by the Board of Directors and stockholders, has audited the consolidated financial statements of the Company and its Subsidiaries in accordance with Philippine Standards on Auditing and has expressed their opinion on the fairness of presentation upon completion of such audit, in their report to the stockholders and Board of Directors dated March 10, 2010.

JAIME AUGUSTO ZOBEL DE AYALA Chairman, Board of Directors and Chief Executive Officer

FERNANDO ZOBEL DE AYALAPresident and Chief Operating Officer

RUFINO LUIS T. MANOTOKChief Finance Officer

2009 ANNUAL REPORT 73

Independent Auditors’ Report

The Stockholders and the Board of DirectorsAyala CorporationTower One, Ayala TriangleAyala Avenue, Makati City

We have audited the accompanying consolidated financial statements of Ayala Corporation and Subsidiaries, whichcomprise the consolidated statements of financial position as at December 31, 2009 and 2008, and the consolidatedstatements of income, the consolidated statements of comprehensive income, consolidated statements of changes inequity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2009, anda summary of significant accounting policies and other explanatory notes. In the consolidated financial statements, theGroup’s investment in the Bank of the Philippine Islands and Subsidiaries is stated at P29,406 million and P28,533 millionas of December 31, 2009 and 2008, respectively, and the Group’s equity in the net income of the Bank of the PhilippineIslands and Subsidiaries is stated at P2,707 million in 2009, P2,145 million in 2008 and P3,291 million in 2007. Thefinancial statements of the Bank of the Philippine Islands and Subsidiaries, in which the Group has a 33.5% interest in2009 and 2008, were audited by other auditors whose report has been furnished to us, and our opinion on theconsolidated financial statements, insofar as it relates to the amounts included for the Bank of the Philippine Islands andSubsidiaries, is based solely on the report of the other auditors.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements inaccordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing andmaintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that arefree from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; andmaking accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conductedour audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethicalrequirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are freefrom material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financialstatements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of materialmisstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditorsconsider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order todesign audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policiesused and the reasonableness of accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained and the report of other auditors are sufficient and appropriate toprovide a basis for our audit opinion.

Opinion

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly,in all material respects, the financial position of Ayala Corporation and Subsidiaries as of December 31, 2009 and 2008,and its financial performance and its cash flows for each of the three years in the period ended December 31, 2009 inaccordance with Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Lucy L. ChanPartnerCPA Certificate No. 88118SEC Accreditation No. 0114-AR-2Tax Identification No. 152-884-511PTR No. 2087400, January 4, 2010, Makati City

March 10, 2010

1

74 AYALA CORPORATION

December 312009 2008

ASSETSCurrent AssetsCash and cash equivalents (Notes 4 and 30) P=45,656,889 P=42,885,792Short-term investments (Notes 5 and 30) 4,560,976 1,008,924Accounts and notes receivable - net (Notes 6, 29 and 30) 25,232,799 23,284,010Inventories (Note 7) 10,797,048 10,011,355Other current assets (Notes 8 and 30) 6,547,004 7,090,394

Total Current Assets 92,794,716 84,280,475Noncurrent AssetsNoncurrent accounts and notes receivable (Notes 6 and 30) 2,657,623 6,694,021Land and improvements (Note 9) 17,582,562 15,756,894Investments in associates and jointly controlled entities - net (Note 10) 71,556,952 68,140,394Investments in bonds and other securities (Notes 11 and 30) 3,543,458 3,064,502Investment properties - net (Note 12) 29,089,730 21,344,980Property, plant and equipment - net (Note 13) 7,771,863 13,884,817Deferred tax assets - net (Note 23) 1,395,992 1,132,847Pension assets (Note 25) 132,419 117,388Intangible assets - net (Note 14) 4,611,884 3,865,397Other noncurrent assets 1,341,836 1,906,172

Total Noncurrent Assets 139,684,319 135,907,412Total Assets P=232,479,035 P=220,187,887

LIABILITIES AND EQUITYCurrent LiabilitiesAccounts payable and accrued expenses (Notes 16, 28 and 29) P=27,664,537 P=27,483,536Short-term debt (Notes 18 and 30) 2,638,658 2,755,447Income tax payable 506,114 214,697Current portion of long-term debt (Notes 18 and 30) 2,453,144 1,478,871Other current liabilities (Note 17) 2,821,932 1,553,530

Total Current Liabilities 36,084,385 33,486,081Noncurrent LiabilitiesLong-term debt - net of current portion (Notes 18 and 30) 51,431,583 50,250,151Deferred tax liabilities - net (Note 23) 207,425 185,536Pension liabilities (Note 25) 228,312 490,744Other noncurrent liabilities (Note 19) 9,109,180 7,588,080

Total Noncurrent Liabilities 60,976,500 58,514,511Total Liabilities 97,060,885 92,000,592

EquityEquity attributable to equity holders of Ayala Corporation

Paid-up capital (Note 20) 37,477,875 37,251,714Share-based payments (Note 26) 1,059,588 705,457Retained earnings (Note 20) 65,739,096 61,604,466Cumulative translation adjustments (1,351,334) (968,778)Net unrealized gain (loss) on available-for-sale financial assets (Note 11) 123,916 (631,127)Parent Company preferred shares held by a subsidiary (Note 20) (100,000) (100,000)Treasury stock (Note 20) (688,714) (550,540)

102,260,427 97,311,192Noncontrolling interests 33,157,723 30,876,103

Total Equity 135,418,150 128,187,295Total Liabilities and Equity P=232,479,035 P=220,187,887

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Financial Position(Amounts in Thousands)

Ayala Corporation and Subsidiaries

2

2009 ANNUAL REPORT 75

Years Ended December 312009 2008 2007

REVENUESales and services (Notes 12 and 29) P=62,627,206 P=64,052,828 P=56,578,214Equity in net income of associates and jointly controlled entities 7,361,015 7,396,180 9,767,222Interest income 2,497,077 2,242,895 1,693,045Other income (Note 21) 3,808,517 5,416,750 10,728,375

76,293,815 79,108,653 78,766,856COSTS AND EXPENSESCosts of sales and services (Notes 7, 12, 21 and 29) 49,318,294 50,014,366 43,169,110General and administrative (Notes 21, 25 and 29) 9,214,570 9,485,514 9,498,306Interest expense and other financing charges (Notes 18 and 21) 3,822,342 4,937,108 4,120,160Other charges (Note 21) 1,435,038 1,595,422 1,569,944

63,790,244 66,032,410 58,357,520INCOME BEFORE INCOME TAX 12,503,571 13,076,243 20,409,336PROVISION FOR INCOME TAX (Note 23)Current 2,010,214 2,442,789 1,979,820Deferred (311,530) (25,234) (7,825)

1,698,684 2,417,555 1,971,995INCOME BEFORE INCOME ASSOCIATED WITH NONCURRENT

ASSETS HELD FOR SALE 10,804,887 10,658,688 18,437,341INCOME ASSOCIATED WITH NONCURRENT ASSETS HELD

FOR SALE - net of tax (Note 15) – – 624,788NET INCOME P=10,804,887 P=10,658,688 P=19,062,129Net Income Attributable to:

Equity holders of Ayala Corporation P=8,154,345 P=8,108,597 P=16,256,601Noncontrolling interests 2,650,542 2,550,091 2,805,528

P=10,804,887 P=10,658,688 P=19,062,129EARNINGS PER SHARE (Note 24)Basic

Income before income associated with noncurrent assets heldfor sale attributable to equity holders of Ayala Corporation P=14.23 P=15.22 P=30.64

Net income attributable to equity holders of Ayala Corporation 14.23 15.22 31.62Diluted

Income before income associated with noncurrent assets heldfor sale attributable to equity holders of Ayala Corporation P=14.19 P=15.17 P=30.50

Net income attributable to equity holders of Ayala Corporation 14.19 15.17 31.47

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income(Amounts in Thousands, Except Earnings Per Share Figures)

Ayala Corporation and Subsidiaries

3

76 AYALA CORPORATION

Years Ended December 312009 2008 2007

NET INCOME P=10,804,887 P=10,658,688 P=19,062,129OTHER COMPREHENSIVE INCOMEExchange differences arising from translations of foreign

investments (260,419) 1,805,405 (2,274,022)Change in fair value of available-for-sale financial assets 431,329 (751,054) 97,688

170,910 1,054,351 (2,176,334)SHARE OF OTHER COMPREHENSIVE INCOME OF

ASSOCIATES AND JOINTLY CONTROLLED ENTITIESExchange differences arising from translations of foreign

investments (226,115) (203,276) (83,389)Change in fair value of available-for-sale financial assets 322,448 (1,586,875) (435,029)

96,333 (1,790,151) (518,418)TOTAL COMPREHENSIVE INCOME P=11,072,130 P=9,922,888 P=16,367,377Total Comprehensive Income Attributable To:

Equity holders of Ayala Corporation P=8,526,832 P=7,093,753 P=13,891,328Noncontrolling interests 2,545,298 2,829,135 2,476,049

P=11,072,130 P=9,922,888 P=16,367,377

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income(Amounts in Thousands)

Ayala Corporation and Subsidiaries

4

2009 ANNUAL REPORT 77

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ce/s

ubsc

riptio

nof

shar

es22

6,16

1(1

,708

)–

––

––

–22

4,45

3C

osto

fsha

re-b

ased

paym

ents

ofA

yala

Cor

pora

tion

–4,

429

––

––

––

4,42

9C

osto

fsha

re-b

ased

paym

ents

ofin

vest

ees

–35

1,41

0–

––

––

63,3

9841

4,80

8A

cqui

sitio

nof

treas

ury

stoc

k–

––

––

–(1

38,1

74)

–(1

38,1

74)

Cas

hdi

vide

nds

––

–(4

,019

,715

)–

––

(537

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)(4

,556

,732

)In

crea

sein

nonc

ontro

lling

inte

rest

s–

––

––

––

209,

941

209,

941

AtD

ecem

ber3

1,20

09P=

37,4

77,8

75P=1

,059

,588

(P=1,

351,

334)

P=65,

739,

096

P=123

,916

(P=10

0,00

0)(P=

688,

714)

P=33,

157,

723

P=135

,418

,150

Con

solid

ated

Sta

tem

ents

of C

hang

es in

Equ

ity(A

mou

nts

in T

hous

ands

)

Aya

la C

orpo

ratio

n an

d Su

bsid

iari

es

5

78 AYALA CORPORATION

Paid

-up

Cap

ital

(Not

e20

)

Shar

e-ba

sed

Paym

ents

(Not

e26

)

Cum

ulat

ive

Tran

slat

ion

Adj

ustm

ents

Ret

aine

dEa

rnin

gs(N

ote

20)N

etU

nrea

lized

Gai

n(L

oss)

on

Ava

ilabl

e-fo

r-Sa

le F

inan

cial

Ass

ets

(Not

e11

)

Pare

ntC

ompa

nyPr

efer

red

Shar

esH

eld

by a

Subs

idia

ry(N

ote

20)Tr

easu

rySt

ock

(Not

e20

)Non

cont

rolli

ngIn

tere

sts

Tota

lEq

uity

Fort

heye

aren

ded

Dec

embe

r31,

2008

AtJ

anua

ry1,

2008

P=26

,855

,394

P=60

3,94

9(P=

2,29

7,07

7)P=

60,1

72,6

21P=

1,71

2,01

6P=

–(P=

159,

693)

P=27

,609

,387

P=11

4,49

6,59

7N

etin

com

e–

––

8,10

8,59

7–

––

2,55

0,09

110

,658

,688

Oth

erco

mpr

ehen

sive

inco

me

––

1,32

8,29

9–

(2,3

43,1

43)

––

279,

044

(735

,800

)To

talc

ompr

ehen

sive

inco

me

––

1,32

8,29

98,

108,

597

(2,3

43,1

43)

––

2,82

9,13

59,

922,

888

Issu

ance

/sub

scrip

tion

ofsh

ares

6,32

2,34

9(2

0,80

1)–

––

––

–6,

301,

548

Add

ition

s to

subs

crip

tions

rece

ivab

le(6

4,74

5)–

––

––

––

(64,

745)

Cos

tofs

hare

-bas

edpa

ymen

tsof

Aya

laC

orpo

ratio

n–

4,01

8–

––

––

–4,

018

Cos

tofs

hare

-bas

edpa

ymen

tsof

inve

stee

s–

118,

291

––

––

–27

,446

145,

737

Par

entC

ompa

nypr

efer

red

shar

eshe

ldby

asu

bsid

iary

––

––

–(1

00,0

00)

––

(100

,000

)A

cqui

sitio

nof

treas

ury

stoc

k–

––

––

–(3

90,8

47)

–(3

90,8

47)

Cas

hdi

vide

nds

––

–(2

,538

,036

)–

––

(552

,592

)(3

,090

,628

)S

tock

divi

dend

s4,

138,

716

––

(4,1

38,7

16)

––

––

–In

crea

sein

nonc

ontro

lling

inte

rest

s–

––

––

––

962,

727

962,

727

AtD

ecem

ber3

1,20

08P=

37,2

51,7

14P=

705,

457

(P=96

8,77

8)P=

61,6

04,4

66(P=

631,

127)

(P=10

0,00

0)(P=

550,

540)

P=30

,876

,103

P=12

8,18

7,29

5

6

2009 ANNUAL REPORT 79

Paid

-up

Cap

ital

(Not

e20

)

Shar

e-ba

sed

Paym

ents

(Not

e26

)

Cum

ulat

ive

Tran

slat

ion

Adj

ustm

ents

Ret

aine

dEa

rnin

gs(N

ote

20)

Net

Unr

ealiz

edG

ain

(Los

s) o

nA

vaila

ble-

for-

Sale

Fin

anci

alA

sset

s(N

ote

11)

Trea

sury

Sto

ck(N

ote

20)

Non

cont

rolli

ngIn

tere

sts

Tota

lEq

uity

Fort

heye

aren

ded

Dec

embe

r31,

2007

AtJ

anua

ry1,

2007

P=23

,137

,948

P=55

8,41

6(P=

298,

310)

P=51

,226

,582

P=2,

078,

522

(P=31

0)P=

24,6

98,7

35P=

101,

401,

583

Net

inco

me

––

16,2

56,6

012,

805,

528

19,0

62,1

29O

ther

com

preh

ensi

vein

com

e–

–(1

,998

,767

)(3

66,5

06)

(329

,479

)(2

,694

,752

)To

talc

ompr

ehen

sive

inco

me

––

(1,9

98,7

67)

16,2

56,6

01(3

66,5

06)

–2,

476,

049

16,3

67,3

77Is

suan

ce/s

ubsc

riptio

nof

shar

es36

4,12

9–

––

––

–36

4,12

9A

dditi

ons

tosu

bscr

iptio

nsre

ceiv

able

(96,

267)

––

––

––

(96,

267)

Cos

tofs

hare

-bas

edpa

ymen

tsof

Aya

laC

orpo

ratio

n–

10,7

18–

––

––

10,7

18C

osto

fsha

re-b

ased

paym

ents

ofin

vest

ees

–34

,815

––

––

201

35,0

16A

cqui

sitio

nof

treas

ury

stoc

k–

––

––

(159

,383

)–

(159

,383

)C

ash

divi

dend

s–

––

(3,8

60,9

78)

––

(533

,625

)(4

,394

,603

)S

tock

divi

dend

s3,

449,

584

––

(3,4

49,5

84)

––

––

Incr

ease

inno

ncon

trolli

ngin

tere

sts

––

––

––

968,

027

968,

027

AtD

ecem

ber3

1,20

07P=2

6,85

5,39

4P=

603,

949

(P=2,

297,

077)

P=60

,172

,621

P=1,

712,

016

(P=15

9,69

3)P=

27,6

09,3

87P=

114,

496,

597

See

acco

mpa

nyin

gN

otes

toC

onso

lidat

edFi

nanc

ial S

tate

men

ts.

Con

solid

ated

Sta

tem

ents

of C

hang

es in

Equ

ity(A

mou

nts

in T

hous

ands

)

Aya

la C

orpo

ratio

n an

d Su

bsid

iari

es

7

80 AYALA CORPORATION

Years Ended December 312009 2008 2007

CASH FLOWS FROM OPERATING ACTIVITIESIncome before income tax P=12,503,571 P=13,076,243 P=20,409,336Adjustments for:

Interest and other financing charges - net of amountcapitalized (Note 21) 3,822,342 3,481,156 4,120,160

Depreciation and amortization (Note 21) 3,345,985 2,940,216 2,988,879Provision for impairment loss (Note 21) 1,435,038 1,259,085 –Cost of share-based payments (Note 26) 471,572 342,919 288,050Equity in net income of associates and jointly controlled entities (7,361,015) (7,396,180) (9,767,222)Interest income (2,497,077) (2,242,895) (1,693,045)Gain on sale of investments (Note 21) (1,698,820) (3,554,679) (8,844,822)Bargain purchase gain (Note 21) (235,851) – –Other investment income (Note 21) (227,015) (264,495) (73,500)Gain on sale of other assets (Note 21) (168,063) (45,409) (54,064)Impairment loss on goodwill (Note 21) – – 662,591

Operating income before changes in working capital 9,390,667 7,595,961 8,036,363Decrease (increase) in:

Accounts and notes receivable (Note 32) 559,913 (8,896,301) (2,254,055)Inventories (863,784) (1,248,050) 1,981,833Other current assets 394,741 (1,197,782) 863,696

Increase (decrease) in:Accounts payable and accrued expenses (538,698) 4,169,567 4,239,429Other current liabilities 977,356 (38,164) 97,469Net pension liabilities (277,463) (17,620) 105,848

Cash generated from operations 9,642,732 367,611 13,070,583Interest received 2,363,205 2,183,379 1,469,236Interest paid (3,921,315) (3,655,908) (3,837,504)Income tax paid (1,407,267) (2,514,143) (1,989,616)Net cash provided by (used in) operating activities 6,677,355 (3,619,061) 8,712,699CASH FLOWS FROM INVESTING ACTIVITIESProceeds from:

Sale of investments 3,280,322 9,777,713 7,930,635Sale of available-for-sale financial assets 775,353 139,095 7,221,574Disposals of property, plant and equipment 853,945 176,166 1,060,647

Maturities of (additions to) short-term investments (3,552,052) 2,678,683 (759,678)Additions to:

Investments (1,872,563) (6,117,884) (2,851,887)Available-for-sale financial assets (926,982) (2,220,736) (2,993,868)Land and improvements (Note 9) (3,396,777) (145,544) (548,392)Investment properties (Note 12) (3,512,819) (773,616) (929,835)Property, plant and equipment (Note 13) (2,488,770) (5,965,432) (3,302,179)

Dividends received from associates and jointly controlled entities 7,679,137 8,326,390 8,050,049Acquisitions through business combinations by subsidiaries - net

of cash acquired (Note 22) (800,312) (891,935) (326,030)Decrease (increase) in other noncurrent assets 583,436 292,557 (631,428)Net cash provided by (used in) investing activities before cash

items associated with noncurrent assets held for sale (3,378,082) 5,275,457 11,919,608Net cash provided by investing activities associated with noncurrent

assets held for sale, including cash balance – – 624,788Net cash provided by (used in) investing activities (3,378,082) 5,275,457 12,544,396

(Forward)

Consolidated Statements of Cash Flows(Amounts in Thousands)

Ayala Corporation and Subsidiaries

8

2009 ANNUAL REPORT 81

Years Ended December 312009 2008 2007

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from:

Short-term and long-term debt P=13,303,049 P=13,045,651 P=21,742,528Issuance of preferred shares – 5,958,307 –Issuance of common shares – – 209,687

Collections of (additions to) subscriptions receivable 31,198 (64,745) (96,267)Payments of short-term and long-term debt (11,826,486) (12,025,905) (21,392,701)Dividends paid (3,626,165) (2,925,409) (4,255,580)Acquisition of treasury shares (Note 20) (138,173) (390,848) (159,383)Redemption of preferred shares – – (2,500,000)Increase in:

Other noncurrent liabilities 1,518,460 396,915 676,578Noncontrolling interests in consolidated subsidiaries 209,941 399,881 962,291

Net cash provided by (used in) financing activities (528,176) 4,393,847 (4,812,847)NET INCREASE IN CASH AND CASH EQUIVALENTS 2,771,097 6,050,243 16,444,248CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 42,885,792 36,835,549 20,391,301CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) P=45,656,889 P=42,885,792 P=36,835,549

See accompanying Notes to Consolidated Financial Statements.

9

82 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

1. Corporate Information

Ayala Corporation (the Company) is incorporated in the Republic of the Philippines. The Company’s registered officeaddress and principal place of business is Tower One, Ayala Triangle, Ayala Avenue, Makati City. The Company is apublicly listed company which is 50.78% owned by Mermac, Inc., 10.55% owned by Mitsubishi Corporation and therest by the public.

The Company is the holding company of the Ayala Group of Companies, with principal business interests in realestate and hotels, financial services and bancassurance, telecommunications, electronics, information technology andbusiness process outsourcing services, utilities, automotives, international and others.

The consolidated financial statements of Ayala Corporation and Subsidiaries (the Group) as of December 31, 2009and 2008 and for each of the three years in the period ended December 31, 2009 were endorsed for approval by theAudit Committee on March 5, 2010 and authorized for issue by the Executive Committee of the Board of Directors(BOD) on March 10, 2010.

2. Summary of Significant Accounting Policies

Basis of PreparationThe accompanying consolidated financial statements of the Group have been prepared on a historical cost basis,except for financial assets at fair value through profit or loss (FVPL), available-for-sale (AFS) financial assets andderivative financial instruments that have been measured at fair value. The consolidated financial statements arepresented in Philippine Peso (P=) and all values are rounded to the nearest thousand pesos (P=000) unless otherwiseindicated.

Statement of ComplianceThe consolidated financial statements of the Group have been prepared in compliance with Philippine FinancialReporting Standards (PFRS).

Basis of ConsolidationThe consolidated financial statements comprise the financial statements of the Group as of December 31, 2009 and2008 and for each of the three years in the period ended December 31, 2009. The financial statements of thesubsidiaries are prepared for the same reporting year as the Company.

The consolidated financial statements are prepared using uniform accounting policies for like transactions and otherevents in similar circumstances. All significant intercompany transactions and balances, including intercompanyprofits and unrealized profits and losses, are eliminated in consolidation.

Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, andcontinue to be consolidated until the date that such control ceases.

The consolidated financial statements comprise the financial statements of the Company and the following wholly andmajority-owned domestic and foreign subsidiaries:

Effective Percentagesof Ownership

2009 2008Real Estate and Hotels:

Ayala Land, Inc. (ALI) and subsidiaries (ALI Group) 53.3* 53.5*Ayala Hotels, Inc. (AHI) and subsidiaries 76.7 76.8

Electronics, Information Technology and BusinessProcess Outsourcing Services:Azalea Technology Investments, Inc. and

subsidiaries (Azalea Technology) 100.0 100.0

(Forward)

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

10

2009 ANNUAL REPORT 83

Effective Percentagesof Ownership

2009 2008Azalea International Venture Partners, Limited

(AIVPL) (British Virgin Islands Company)and subsidiaries 100.0 100.0

LiveIt Solutions, Inc. (LSI) and subsidiaries 100.0 100.0Technopark Land, Inc. 78.8 78.8Integrated Microelectronics, Inc. (IMI) and

subsidiaries** 67.8 67.8Automotive:

Ayala Automotive Holdings Corporation (AAHC)and subsidiaries 100.0 100.0

International and Others:Bestfull Holdings Limited (incorporated in Hong Kong)

and subsidiaries (BHL Group) 100.0 100.0AC International Finance Limited (ACIFL)

(Cayman Island Company) and subsidiary 100.0 100.0AYC Finance Ltd. (Cayman Island Company) 100.0 100.0Michigan Holdings, Inc. (MHI) and subsidiary 100.0 100.0Ayala Aviation Corporation 100.0 100.0Darong Agricultural and Development Corporation 100.0 100.0

*The Company owns 75.33% and 75.46% of the total common and preferred shares of ALI as of December 31, 2009 and 2008, respectively.** A subsidiary of AYC Holdings, Ltd. which is a subsidiary of ACIFL.

On various dates in 2008, the Company converted US$171.88 million of its deposits for future stock subscription inAIVPL into equity, increasing the Company’s ownership from 68.71% to 97.78%. Consequently, Azalea Technology’sownership in AIVPL was diluted from 31.29% to 2.22%.

On May 1, 2008, AIVPL converted its US$124 million deposits for future stock subscription in LiveIt Investments Ltd.(LIL) giving it 99.99% ownership interest in LIL. LSI, which previously held 100% of LIL, now holds 0.01% stake inLIL. LIL carries the Group’s investments in Integreon Managed Solutions Inc. (Integreon), Affinity Express Inc. andNewbridge International Investments (Newbridge).

On March 1, 2008, the Company entered into a Deed of Assignment with AIVPL to transfer the Company’s shares ofBayantrade in exchange for AIVPL’s shares of stocks.

Noncontrolling interests represent the portion of profit or loss and net assets in subsidiaries not wholly owned and arepresented separately in the consolidated statements of income and changes in equity and within the equity section inthe consolidated statements of financial position, separately from the Company’s equity. Acquisitions ofnoncontrolling interests are accounted for using the parent entity extension method, whereby, the difference betweenthe consideration and the book value of the share of the nets assets acquired is recognized as goodwill.

Changes in Accounting PoliciesThe accounting policies adopted are consistent with those of the previous financial years except for the adoption ofthe following new and amended PFRS and Philippine Interpretations of International Financial ReportingInterpretation Committee (IFRIC) which became effective beginning January 1, 2009.

PAS 1, Presentation of Financial StatementsThe revised standard introduces a new statement of comprehensive income that combines all items of income andexpenses recognized in the profit or loss together with ‘other comprehensive income’. Entities may choose to presentall items in one statement, or to present two linked statements, a separate statement of income and a statement ofcomprehensive income. This Standard also requires additional requirements in the presentation of the statements offinancial position and owner’s equity as well as additional disclosures to be included in the financial statements. TheGroup elected to present two statements, a consolidated statement of income and a consolidated statement ofcomprehensive income. The consolidated financial statements have been prepared following the revised disclosurerequirements.

PAS 23, Borrowing CostsThe Standard has been revised to require capitalization of borrowing costs when such costs relate to a qualifyingasset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intendeduse or sale. It has been the Group’s policy to capitalize borrowing costs, and as such, adoption of this revisedstandard did not have any impact on the consolidated financial statements.

11

84 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

PFRS 8, Operating SegmentsPFRS 8 replaced PAS 14, Segment Reporting, and adopts a full management approach to identifying, measuring anddisclosing the results of an entity’s operating segments. The information reported would be that which managementuses internally for evaluating the performance of operating segments and allocating resources to those segments.Such information may be different from that reported in the consolidated statements of financial position andconsolidated statement of income and the Group will provide explanations and reconciliations of the differences. ThisStandard is only applicable to an entity that has debt or equity instruments that are traded in a public market or thatfiles (or is in the process of filing) its financial statements with a securities commission or similar party. The Grouphas enhanced its current manner of reporting segment information to include additional information used bymanagement internally. Segment information from prior years was restated to include additional information(see Note 27).

Philippine Interpretation IFRIC 13, Customer Loyalty ProgrammesThis Interpretation requires customer loyalty award credits to be accounted for as a separate component of the salestransaction in which they are granted and therefore part of the fair value of the consideration received is allocated tothe award credits and realized in income over the period that the award credits are redeemed or expire. The Groupdoes not grant loyalty award credits to customers. As such, adoption of this Interpretation did not have any impact onthe consolidated financial statements.

Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign OperationThis Interpretation provides guidance on identifying foreign currency risks that qualify for hedge accounting in thehedge of a net investment; where within the group the hedging instrument can be held in the hedge of a netinvestment; and how an entity should determine the amount of foreign currency gains or losses, relating to both thenet investment and the hedging instrument, to be recycled on disposal of the net investment. Adoption of thisInterpretation did not have any impact on the consolidated financial statements.

Amendment to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of Financial Statements -Puttable Financial Instruments and Obligations Arising on LiquidationThese amendments specify, among others, that puttable financial instruments will be classified as equity if they haveall of the following specified features: (a) Instrument entitles the holder to require the entity to repurchase or redeemthe instrument (either on an ongoing basis or on liquidation) for a pro rata share of the entity’s net assets,(b) Instrument is in the most subordinate class of instruments, with no priority over other claims to the assets of theentity on liquidation, (c) Instruments in the subordinate class have identical features; (d) The instrument does notinclude any contractual obligation to pay cash or financial assets other than the holder’s right to a pro rata share of theentity’s net assets; and (e) Total expected cash flows attributable to the instrument over its life are based substantiallyon the profit or loss, a change in recognized net assets, or a change in the fair value of the recognized andunrecognized net assets of the entity over the life of the instrument. Adoption of these amendments did not have anyimpact on the consolidated financial statements.

Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards and PAS 27, Consolidatedand Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or AssociateThe amended PFRS 1 allows an entity, in its separate financial statements, to determine the cost of investments insubsidiaries, jointly controlled entities or associates (in its opening PFRS financial statements) as one of the followingamounts: a) cost determined in accordance with PAS 27; b) at the fair value of the investment at the date of transitionto PFRS, determined in accordance with PAS 39; or c) previous carrying amount (as determined under generallyaccepted accounting principles) of the investment at the date of transition to PFRS. The Amendments to PAS 27 haschanges in respect of the holding companies’ separate financial statements including (a) the deletion of ‘cost method’,making the distinction between pre- and post-acquisition profits no longer required; and (b) in cases ofreorganizations where a new parent is inserted above an existing parent of the group (subject to meeting specificrequirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiaryrather than its fair value. All dividends will be recognized in profit or loss. However, the payment of such dividendsrequires the entity to consider whether there is any indicator of impairment. The new requirement does not have animpact on the consolidated financial statements.

Amendments to PFRS 2, Share-based Payment - Vesting Condition and CancellationsThis Standard has been revised to clarify the definition of a vesting condition and prescribes the treatment for anaward that is effectively cancelled. It defines a vesting condition as a condition that includes an explicit or implicitrequirement to provide services. It further requires nonvesting conditions to be treated in a similar fashion to marketconditions. Failure to satisfy a nonvesting condition that is within the control of either the entity or the counterparty isaccounted for as a cancellation. However, failure to satisfy a nonvesting condition that is beyond the control of eitherparty does not give rise to a cancellation. Adoption of this revised standard did not have any impact on theconsolidated financial statements.

12

2009 ANNUAL REPORT 85

Amendment to PFRS 7, Financial Instruments: DisclosuresThe amended PFRS 7 requires additional disclosure about fair value measurement and liquidity risk. Fair valuemeasurements related to items recorded at fair value are to be disclosed by source of inputs using a three levelhierarchy for each class of financial instrument. In addition, a reconciliation between the beginning and endingbalance for Level 3 fair value measurements is now required, as well as significant transfers between Level 1 andLevel 2 fair value measurements. The amendments also clarify the requirements for liquidity risk disclosures asfollows: (a) exclusion of derivative liabilities from maturity analysis unless the contractual maturities are essential foran understanding of the timing of the cash flows; and (b) inclusion of financial guarantee contracts in the contractualmaturity analysis based on the maximum amount guaranteed. The fair value measurement disclosures are presentedin Note 30 to the consolidated financial statements while the current liquidity risk disclosures are not significantlyimpacted by the amendments.

Amendment to Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives and PAS 39, FinancialInstruments: Recognition and MeasurementThese amendments require an entity to assess whether an embedded derivative must be separated from a hostcontract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. Thisassessment is to be made based on circumstances that existed on the later of the date the entity first became a partyto the contract and the date of any contract amendments that significantly change the cash flows of the contract.PAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument mustremain classified as fair value through profit or loss. Adoption of these amendments did not have any impact on theconsolidated financial statements.

Improvements to PFRSIn May 2008 and April 2009, the International Accounting Standards Board issued its first omnibus of amendments tocertain standards, primarily with a view to removing inconsistencies and clarifying wordings. There are separatetransitional provisions for each Standard. These amendments are effective beginning January 1, 2009. The adoptionof the following amendments resulted in changes to accounting policies but did not have any impact on theconsolidated financial statements.

PFRS 5, Noncurrent Assets Held for Sale and Discontinued OperationsWhen a subsidiary is held for sale, all of its assets and liabilities will be classified as held for sale under PFRS 5,even when the entity retains a noncontrolling interests in the subsidiary after the sale.

PAS 1, Presentation of Financial StatementsAssets and liabilities classified as held for trading are not automatically classified as current in the consolidatedstatement of financial position.

PAS 16, Property, Plant and EquipmentThis amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’, to be consistent withPFRS 5 and PAS 36, Impairment of Assets.

Items of property, plant and equipment held for rental that are routinely sold in the ordinary course of businessafter rental, are transferred to inventory when rental ceases and they are held for sale. Proceeds of such salesare subsequently shown as revenue. Cash payments on initial recognition of such items, the cash receipts fromrents and subsequent sales are all shown as cash flows from operating activities.

PAS 18, RevenueThe amendment adds guidance (which accompanies the Standard) to determine whether an entity is acting as aprincipal or as an agent. The features to consider are whether the entity:

a. has primary responsibility for providing the goods or service;b. has inventory risk;c. has discretion in establishing prices; and,d. bears the credit risk

The Group assessed its revenue arrangements against these criteria and concluded that it is acting as principalin all arrangements.

PAS 19, Employee BenefitsRevises the definition of ‘past service cost’ to include reduction in benefits related to past services (‘negative pastservice cost’) and to exclude reduction in benefits related to future services that arise from plan amendments.Amendments to plans that result in a reduction in benefits related to future services are accounted for as acurtailment.

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It revises the definition of ‘return on plan assets’ to exclude plan administration costs if they have already beenincluded in the actuarial assumptions used to measure the defined benefit obligation.

Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus on the point in time atwhich the liability is due to be settled and it deletes the reference to the recognition of contingent liabilities toensure consistency with PAS 37, Provisions, Contingent Liabilities and Contingent Assets.

PAS 23, Borrowing CostsRevises the definition of borrowing costs to consolidate the types of items that are considered components of‘borrowing costs’, i.e., components of the interest expense calculated using the effective interest rate method.

PAS 28, Investments in AssociatesIf an associate is accounted for at fair value in accordance with PAS 39, only the requirement of PAS 28 todisclose the nature and extent of any significant restrictions on the ability of the associate to transfer funds to theentity in the form of cash or repayment of loans applies.

An investment in an associate is a single asset for the purpose of conducting the impairment test. Therefore, anyimpairment test is not separately allocated to the goodwill included in the investment balance.

PAS 29, Financial Reporting in Hyperinflationary EconomiesRevises the reference to the exception that assets and liabilities should be measured at historical cost, such thatit notes property, plant and equipment as being an example, rather than implying that it is a definitive list.

PAS 31, Interests in Joint VenturesIf a joint venture is accounted for at fair value in accordance with PAS 39, only the requirements of PAS 31 todisclose the commitments of the venturer and the joint venture, as well as summary financial information aboutthe assets, liabilities, income and expense will apply.

PAS 36, Impairment of AssetsWhen discounted cash flows are used to estimate ‘fair value less costs to sell’, additional disclosure is requiredabout the discount rate, consistent with disclosures required when the discounted cash flows are used toestimate ‘value in use’.

PAS 38, Intangible AssetsExpenditure on advertising and promotional activities is recognized as an expense when the Group either has theright to access the goods or has received the services. Advertising and promotional activities now specificallyinclude mail order catalogues.

It deletes references to there being rarely, if ever, persuasive evidence to support an amortization method forfinite life intangible assets that results in a lower amount of accumulated amortization than under the straight-linemethod, thereby effectively allowing the use of the unit-of-production method.

PAS 39, Financial Instruments: Recognition and MeasurementChanges in circumstances relating to derivatives, specifically derivatives designated or de-designated as hedginginstruments after initial recognition are not reclassifications.

When financial assets are reclassified as a result of an insurance company changing its accounting policy inaccordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a change in circumstance, not areclassification.

It removes the reference to a ‘segment’ when determining whether an instrument qualifies as a hedge.

It requires use of the revised effective interest rate (rather than the original effective interest rate) whenre-measuring a debt instrument on the cessation of fair value hedge accounting.

PAS 40, Investment PropertyIt revises the scope (and the scope of PAS 16) to include property that is being constructed or developed forfuture use as an investment property. Where an entity is unable to determine the fair value of an investmentproperty under construction, but expects to be able to determine its fair value on completion, the investmentunder construction will be measured at cost until such time as fair value can be determined or construction iscomplete.

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PAS 41, AgricultureIt removes the reference to the use of a pre-tax discount rate to determine fair value, thereby allowing use ofeither a pre-tax or post-tax discount rate depending on the valuation methodology used.

It removes the prohibition to take into account cash flows resulting from any additional transformations whenestimating fair value. Instead, cash flows that are expected to be generated in the ‘most relevant market’ aretaken into account.

Future Changes in Accounting PoliciesThe Group will adopt the following standards and interpretations enumerated below when these become effective.Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS andPhilippine Interpretations to have significant impact on the consolidated financial statements.

Effective in 2010

Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial StatementsThe revised PFRS 3 and revised PAS 27 will be effective for annual periods beginning on or after July 1, 2009.Revised PFRS 3 introduces a number of changes in the accounting for business combinations that will impact theamount of goodwill recognized, the reported results in the period that an acquisition occurs, and future reportedresults. Revised PAS 27 requires, among others, that (a) change in ownership interests of a subsidiary (that do notresult in loss of control) will be accounted for as an equity transaction and will have no impact on goodwill nor will itgive rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling andnoncontrolling interests (previously referred to as ‘minority interests’); even if the losses exceed the noncontrollingequity investment in the subsidiary; and (c) on loss of control of a subsidiary, any retained interest will be remeasuredto fair value and this will impact the gain or loss recognized on disposal. The changes introduced by the revisedPFRS 3 must be applied prospectively, while changes introduced by revised PAS 27 must be applied retrospectivelywith a few exceptions. The changes will affect future acquisitions and transactions with noncontrolling interest.

Amendment to PAS 39, Financial Instruments: Recognition and Measurement - Eligible hedged itemsThe Amendment to PAS 39 will be effective for annual periods beginning on or after July 1, 2009. This Amendmentaddresses only the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged riskor portion in particular situations. This amendment clarifies that an entity is permitted to designate a portion of the fairvalue changes or cash flow variability of a financial instrument as a hedged item.

Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets to OwnersIFRIC 17 will be effective for annual periods beginning on or after July 1, 2009. This Interpretation provides guidanceon the following types of non-reciprocal distributions of assets by an entity to its owners acting in their capacity asowners: (a) distributions of non-cash assets (e.g. items of property, plant and equipment, businesses as defined inPFRS 3, ownership interests in another entity or disposal groups as defined in PFRS 5; and (b) distributions that giveowners a choice of receiving either non-cash assets or a cash alternative. The Group does not expect theInterpretation to have an impact on the consolidated financial statements.

Philippine Interpretation IFRIC 18, Transfers of Assets from CustomersThis Interpretation will be effective for annual periods beginning on or after July 1, 2009. This Interpretation is to beapplied prospectively to transfers of assets from customers received on or after July 1, 2009. The Interpretationprovides guidance on how to account for items of property, plant and equipment received from customers or cash thatis received and used to acquire or construct assets that are used to connect the customer to a network or to provideongoing access to a supply of goods or services or both. When the transferred item meets the definition of an asset,the asset is measured at fair value on initial recognition as part of an exchange transaction. The service(s) deliveredare identified and the consideration received (the fair value of the asset) allocated to each identifiable service.Revenue is recognized as each service is delivered by the entity.

Amendments to PFRS 2, Group Cash-settled Share-based Payment TransactionsThe amendments to PFRS 2, Share-based Payments is effective for annual periods beginning on or after January 1,2010, clarify the scope and the accounting for group cash-settled share-based payment transactions. The Group hasconcluded that the amendment will have no impact on the financial position or performance of the Group as the Grouphas not entered into any such share-based payment transactions.

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Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Improvements to PFRSThe omnibus amendments to PFRSs issued in 2009 were issued primarily with a view to removing inconsistenciesand clarifying wording. The amendments are effective for annual periods beginning January 1, 2010 except asotherwise stated. The Group has not yet adopted the following amendments and anticipates that these changes willhave no material effect on the consolidated financial statements.

PFRS 2, Share-based PaymentThe Amendment clarifies that the contribution of a business on formation of a joint venture and combinationsunder common control are not within the scope of PFRS 2 even though they are out of scope of PFRS 3. Theamendment is effective for financial years on or after July 1, 2009.

PFRS 5, Noncurrent Assets Held for Sale and Discontinued OperationsThe Amendment clarifies that the disclosures required in respect of noncurrent assets and disposal groupsclassified as held for sale or discontinued operations are only those set out in PFRS 5. The disclosurerequirements of other PFRSs only apply if specifically required for such non-current assets or discontinuedoperations.

PFRS 8, Operating Segment InformationThe Amendment clarifies that segment assets and liabilities need only be reported when those assets andliabilities are included in measures that are used by the chief operating decision maker.

PAS 1, Presentation of Financial StatementsThe Amendment clarifies that the terms of a liability that could result, at anytime, in its settlement by the issuanceof equity instruments at the option of the counterparty do not affect its classification.

PAS 7, Statement of Cash FlowsThe Amendment explicitly states that only expenditure that results in a recognized asset can be classified as acash flow from investing activities.

PAS 17, LeasesThe Amendment removes the specific guidance on classifying land as a lease. Prior to the amendment, leases ofland were classified as operating leases. The amendment now requires that leases of land are classified as either‘finance’ or ‘operating’ in accordance with the general principles of PAS 17. The amendments will be appliedretrospectively.

PAS 36, Impairment of AssetsThe Amendment clarifies that the largest unit permitted for allocating goodwill, acquired in a businesscombination, is the operating segment as defined in PFRS 8 before aggregation for reporting purposes.

PAS 38, Intangible AssetsThe Amendment clarifies that if an intangible asset acquired in a business combination is identifiable only withanother intangible asset, the acquirer may recognize the group of intangible assets as a single asset provided theindividual assets have similar useful lives. Also clarifies that the valuation techniques presented for determiningthe fair value of intangible assets acquired in a business combination that are not traded in active markets areonly examples and are not restrictive on the methods that can be used.

PAS 39, Financial Instruments: Recognition and MeasurementThe Amendment clarifies the following:

i. that a prepayment option is considered closely related to the host contract when the exercise price of aprepayment option reimburses the lender up to the approximate present value of lost interest for theremaining term of the host contract.

ii. that the scope exemption for contracts between an acquirer and a vendor in a business combination tobuy or sell an acquiree at a future date applies only to binding forward contracts, and not derivativecontracts where further actions by either party are still to be taken.

iii. that gains or losses on cash flow hedges of a forecast transaction that subsequently results in therecognition of a financial instrument or on cash flow hedges of recognized financial instruments shouldbe reclassified in the period that the hedged forecast cash flows affect profit or loss.

Philippine Interpretation IFRIC 9, Reassessment of Embedded DerivativesThe Amendment clarifies that it does not apply to possible reassessment at the date of acquisition, to embeddedderivatives in contracts acquired in a business combination between entities or businesses under commoncontrol or the formation of joint venture.

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Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign OperationThe Amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instrumentsmay be held by any entity or entities within the group, including the foreign operation itself, as long as thedesignation, documentation and effectiveness requirements of PAS 39 that relate to a net investment hedge aresatisfied.

Effective in 2012

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real EstateThis Interpretation covers accounting for revenue and associated expenses by entities that undertake the constructionof real estate directly or through subcontractors. This Interpretation requires that revenue on construction of realestate be recognized only upon completion, except when such contract qualifies as a construction contract to beaccounted for under PAS 11, Construction Contracts, or involves rendering of services, in which case revenue isrecognized based on stage of completion. Contracts involving provision of services with the construction materialsand where the risks and reward of ownership are transferred to the buyer on a continuous basis will also beaccounted for based on stage of completion. The adoption of this Interpretation will be accounted for retrospectively,and will result to restatement of prior period financial statements. The adoption of this Interpretation may significantlyaffect the determination of revenue for real estate sales and the corresponding cost, and the related tradereceivables, deferred tax liabilities and retained earnings accounts. The Group is in the process of quantifying theimpact of adoption of this Interpretation when it becomes effective in 2012.

Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readilyconvertible to known amounts of cash with original maturities of three months or less from dates of acquisition andwhich are subject to an insignificant risk of change in value.

Financial InstrumentsDate of recognitionThe Group recognizes a financial asset or a financial liability in the consolidated statement of financial position when itbecomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that requiredelivery of assets within the time frame established by regulation or convention in the marketplace are recognized onthe settlement date.

Initial recognition of financial instrumentsAll financial assets and financial liabilities are recognized initially at fair value. Except for securities at FVPL, the initialmeasurement of financial assets includes transaction costs. The Group classifies its financial assets in the followingcategories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, and AFS financialassets. The Group also classifies its financial liabilities into financial liabilities at FVPL and other financial liabilities.The classification depends on the purpose for which the investments were acquired and whether they are quoted inan active market.

The Group determines the classification of its financial assets and financial liabilities at initial recognition and, whereallowed and appropriate, re-evaluates such designation at every reporting date.

Financial instruments are classified as liability or equity in accordance with the substance of the contractualarrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financialliability, are reported as expense or income. Distributions to holders of financial instruments classified as equity arecharged directly to equity net of any related income tax benefits.

Determination of fair valueThe fair value for financial instruments traded in active markets at the reporting date is based on their quoted marketprice or dealer price quotations (bid price for long positions and ask price for short positions), without any deductionfor transaction costs. When current bid and ask prices are not available, the price of the most recent transactionprovides evidence of the current fair value as long as there has not been a significant change in economiccircumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriatevaluation methodologies. Valuation methodologies include net present value techniques, comparison to similarinstruments for which market observable prices exist, option pricing models, and other relevant valuation models.

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Day 1 profitWhere the transaction price in a non-active market is different from the fair value from other observable currentmarket transactions in the same instrument or based on a valuation technique whose variables include only data fromobservable market, the Group recognizes the difference between the transaction price and fair value (a ‘Day 1’ profit)in the consolidated statement of income under “Interest income” or “Interest expense and other financing charges”unless it qualifies for recognition as some other type of asset or liability. In cases where use is made of data which isnot observable, the difference between the transaction price and model value is only recognized in the consolidatedstatement of income when the inputs become observable or when the instrument is derecognized. For eachtransaction, the Group determines the appropriate method of recognizing the ‘Day 1’ profit amount.

Financial assets at FVPLFinancial assets at FVPL include financial assets held for trading and financial assets designated upon initialrecognition as at FVPL.

Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term.Derivatives, including separated embedded derivatives, are also classified as held for trading unless they aredesignated as effective hedging instruments or a financial guarantee contract. Fair value gains or losses oninvestments held for trading, net of interest income accrued on these assets, are recognized in the consolidatedstatement of income under “Other income” or “Other charges”. Interest earned or incurred is recorded in “Interestincome” or “Interest expense and other financing charges” while dividend income is recorded when the right ofpayments has been established.

Where a contract contains one or more embedded derivatives, the hybrid contract may be designated as financialasset at FVPL, except where the embedded derivative does not significantly modify the cash flows or it is clear thatseparation of the embedded derivative is prohibited.

Financial assets may be designated at initial recognition as at FVPL if any of the following criteria are met: (i) thedesignation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuringthe assets or recognizing gains or losses on them on a different basis; or (ii) the assets are part of a group of financialassets which are managed and their performance evaluated on a fair value basis, in accordance with a documentedrisk management or investment strategy; or (iii) the financial instrument contains an embedded derivative that wouldneed to be separately recorded.

The Group’s financial assets at FVPL pertain to government securities and other investment securities and derivativesnot designated as hedges.

Derivative financial instrumentsDerivative instruments (including bifurcated embedded derivatives) are initially recognized at fair value on the date inwhich a derivative transaction is entered into or bifurcated, and are subsequently remeasured at fair value. Any gainsor losses arising from changes in fair value of derivatives that do not qualify for hedge accounting are taken directly tothe consolidated statement of income. Derivatives are carried as assets when the fair value is positive and asliabilities when the fair value is negative.

Derivative financial instruments also include bifurcated embedded derivatives. An embedded derivative is separatedfrom the host contract and accounted for as a derivative if all of the following conditions are met: a) the economiccharacteristics and risks of the embedded derivative are not closely related to the economic characteristics and risksof the host contract; b) a separate instrument with the same terms as the embedded derivative would meet thedefinition of a derivative; and c) the hybrid or combined instrument is not recognized at FVPL.

The Group assesses whether embedded derivatives are required to be separated from the host contracts when theGroup first becomes a party to the contract. Reassessment of embedded derivatives is only done when there arechanges in the contract that significantly modifies the contractual cash flows.

For bifurcated embedded derivatives in financial contracts that are not designated or do not qualify as hedges,changes in the fair values of such transactions are recognized in the consolidated statement of income.

Contracts that are entered into and continue to be held for the purpose of the receipt of the raw materials inaccordance with the Group’s expected usage requirements are considered normal purchase agreements.

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HTM investmentsHTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturitiesthat the Group has the positive intention and ability to hold to maturity. Where the Group sell other than aninsignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS financialassets. After initial measurement, these investments are measured at amortized cost using the effective interest ratemethod, less impairment in value. Amortized cost is calculated by taking into account any discount or premium onacquisition and fees that are an integral part of the effective interest rate. The amortization is included in “Interestincome” in the consolidated statement of income. Gains and losses are recognized in the consolidated statement ofincome when the HTM investments are derecognized or impaired, as well as through the amortization process. Thelosses arising from impairment of such investments are recognized in the consolidated statement of income under“Other charges” account. HTM investments are included in current assets if expected to be realized within 12 monthsfrom reporting date. HTM investments that are not due in the next 12 months are presented under “Investments inbonds and other securities” account in the consolidated statement of financial position.

The Group’s HTM investments pertain to bonds included under “Other current assets” account in 2008.

Loans and receivablesLoans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted inan active market. They are not entered into with the intention of immediate or short-term resale and are notdesignated as AFS financial assets or financial asset at FVPL. This accounting policy relates both to the statementsof financial position captions “Short-term investments” and “Accounts and notes receivable” (except for Advances tocontractors).

After initial measurement, loans and receivables are subsequently measured at amortized cost using the effectiveinterest rate method, less any allowance for impairment losses. Amortized cost is calculated by taking into accountany discount or premium on acquisition and fees that are an integral part of the effective interest rate. Theamortization is included in the “Interest income” account in the consolidated statement of income. The losses arisingfrom impairment of such loans and receivables are recognized under “Provision for doubtful accounts” in theconsolidated statement of income.

Loans and receivables are included in current assets if maturity is within 12 months from the reporting date.

AFS financial assetsAFS financial assets are those which are designated as such or do not qualify to be classified as designated at FVPL,HTM, or loans and receivables.

Financial assets may be designated at initial recognition as AFS if they are purchased and held indefinitely, and maybe sold in response to liquidity requirements or changes in market conditions.

After initial measurement, AFS financial assets are measured at fair value. The unrealized gains or losses arisingfrom the fair valuation of AFS financial assets are recognized in the consolidated statement of comprehensive incomeand are reported as “Net unrealized gain (loss) on available-for-sale financial assets” (net of tax where applicable) inequity. The Group’s share in its associates’ net unrealized gain (loss) on AFS is likewise included in this account.

When the security is disposed of, the cumulative gain or loss previously recognized in equity is recognized in theconsolidated statement of income under “Other income” or “Other charges”. Where the Group holds more than oneinvestment in the same security, the cost is determined using the weighted average method. Interest earned on AFSfinancial assets is reported as interest income using the effective interest rate. Dividends earned are recognizedunder “Other income” in the consolidated statement of income when the right to receive payment is established. Thelosses arising from impairment of such investments are recognized under “Provision for impairment losses” in theconsolidated statement of income (see Note 21).

When the fair value of AFS financial assets cannot be measured reliably because of lack of reliable estimates offuture cash flows and discount rates necessary to calculate the fair value of unquoted equity instruments, theseinvestments are carried at cost, less any allowance for impairment losses.

The Group’s AFS financial assets pertain to investments in quoted and unquoted equity securities included under“Investments in bonds and other securities” in the consolidated statement of financial position. AFS financial assetsare included in current assets if expected to be realized within 12 months from reporting date.

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Loans and receivables and HTM investmentsFor loans and receivables and HTM investments carried at amortized cost, the Group first assesses whether objectiveevidence of impairment exists individually for financial assets that are individually significant, or collectively forfinancial assets that are not individually significant. If the Group determines that no objective evidence of impairmentexists for an individually assessed financial asset, whether significant or not, it includes the asset in a group offinancial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristicsare relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ abilityto pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individuallyassessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in acollective assessment for impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as thedifference between the asset’s carrying amount and the present value of estimated future cash flows (excluding futurecredit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., theeffective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use ofan allowance account and the amount of the loss is charged to the consolidated statement of income under “Provisionfor doubtful accounts” (see Note 21). Interest income continues to be recognized based on the original effectiveinterest rate of the asset. Loans and receivables, together with the associated allowance accounts, are written offwhen there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent period,the amount of the estimated impairment loss decreases because of an event occurring after the impairment wasrecognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss isrecognized in profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at thereversal date.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit riskcharacteristics such as customer type, payment history, past-due status and term.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on thebasis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historicalloss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that didnot affect the period on which the historical loss experience is based and to remove the effects of conditions in thehistorical period that do not exist currently. The methodology and assumptions used for estimating future cash flowsare reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

Financial assets carried at costIf there is an objective evidence that an impairment loss has been incurred on an unquoted equity instrument that isnot carried at fair value because its fair value cannot be reliably measured, or on derivative asset that is linked to andmust be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as thedifference between the carrying amount and the present value of estimated future cash flows discounted at thecurrent market rate of return for a similar financial asset.

AFS financial assetsIn the case of equity investments classified as AFS financial assets, impairment would include a significant orprolonged decline in the fair value of the investments below its cost. “Significant” is to be evaluated against theoriginal cost of the investment and “prolonged” against the period in which the fair value has been below its originalcost. Where there is evidence of impairment loss, the cumulative loss - measured as the difference between theacquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized inthe consolidated statement of income - is removed from other comprehensive income and recognized in theconsolidated statement of income under “Other charges”. Impairment losses on equity investments are not reversedthrough the consolidated statement of income. Increases in fair value after impairment are recognized directly in theconsolidated statement of comprehensive income.

In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria as financialassets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accruedusing the rate of interest used to discount future cash flows for the purpose of measuring impairment loss and isrecorded as part of “Interest income” account in the consolidated statement of income. If, in a subsequent year, thefair value of a debt instrument increased and the increase can be objectively related to an event occurring after theimpairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through theconsolidated statement of income.

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Offsetting Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount reported in the consolidated statement offinancial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and thereis an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

InventoriesInventories are carried at the lower of cost and net realizable value (NRV). Costs incurred in bringing each product toits present location and conditions are generally accounted for as follows:

Real estate inventories - cost includes those costs incurred for the development and improvement of properties,including capitalized borrowing costs.

Vehicles - purchase cost on specific identification basis.

Finished goods and work-in-process - determined on a moving average basis; cost includes direct materials andlabor and a proportion of manufacturing overhead costs based on normal operating capacity.

Parts and accessories, materials, supplies and others - purchase cost on a moving average basis.

NRV for real estate inventories, vehicles, finished goods and work-in-process and parts and accessories is theestimated selling price in the ordinary course of business, less estimated costs of completion and estimated costsnecessary to make the sale, while NRV for materials, supplies and others represents the related replacement costs.

Noncurrent Assets Held for SaleNoncurrent assets held for sale are carried at the lower of its carrying amount and fair value less costs to sell. Ateach reporting date, the Group classifies assets as held for sale (disposal group) when their carrying amount will berecovered principally through a sale transaction rather than through continuing use. For this to be the case, the assetmust be available for immediate sale in its present condition subject only to terms that are usual and customary forsales of such assets and its sale must be highly probable. For the sale to be highly probable the appropriate level ofmanagement must be committed to a plan to sell the asset and an active program to locate a buyer and complete theplan must have been initiated. Further, the asset must be actively marketed for sale at a price that is reasonable inrelation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed salewithin one year from the date of classification.

The related results of operations and cash flows of the disposal group that qualified as discontinued operation areseparated from the results of those that would be recovered principally through continuing use, and prior years’consolidated statement of income and cash flows are re-presented. Results of operations and cash flows of thedisposal group that qualified as discontinued operation are presented in the consolidated statement of income andconsolidated statement of cash flows as items associated with noncurrent assets held for sale.

Land and ImprovementsLand and improvements consist of properties for future development and are carried at the lower of cost or NRV.NRV is the estimated selling price in the ordinary course of business, less estimated cost of completion and estimatedcosts necessary to make the sale. Cost includes cost of purchase and those costs incurred for improvement of theproperties.

Investments in Associates and Jointly Controlled EntitiesInvestments in associates and jointly controlled entities (investee companies) are accounted for under the equitymethod, except for an interest in a joint venture, which is accounted for using proportionate consolidation. Anassociate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture.A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that issubject to joint control, and a jointly controlled entity is a joint venture that involves the establishment of a separateentity in which each venturer has an interest.

An investment in a associate or joint venture is accounted for using the equity method from the day it becomes anassociate or joint venture. On acquisition of investment, the excess of the cost of investment over the investor’s sharein the net fair value of the investee’s identifiable assets, liabilities and contingent liabilities is accounted for as goodwilland included in the carrying amount of the investment and neither amortized nor individually tested for impairment.Any excess of the investor’s share of the net fair value of the associate’s identifiable assets, liabilities and contingentliabilities over the cost of the investment is excluded from the carrying amount of the investment, and is insteadincluded as income in the determination of the share in the earnings of the investees.

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2009 ANNUAL REPORT 95

Under the equity method, investments in associates and jointly controlled entities are carried in the consolidatedstatement of financial position at cost plus post-acquisition changes in the Group’s share in the net assets of theinvestees, less any impairment in value. The Group’s share in the investee’s post-acquisition profits or losses isrecognized in the consolidated statement of income, and its share of post-acquisition movements in the investee’sequity reserves is recognized directly in equity. Profits and losses resulting from transactions between the Group andthe investee companies are eliminated to the extent of the interest in the investee companies and to the extent that forunrealized losses, there is no evidence of impairment of the asset transferred. Dividends received are treated as areduction of the carrying value of the investment. Under the proportionate consolidation method for the Group’sinterest in a joint venture through Makati Development Corporation (MDC), an ALI subsidiary, the Group combines itsshare of each of the assets, liabilities, income and expenses of the joint venture with similar items, line by line, in itsfinancial statements. The financial statements of the joint venture are prepared for the same reporting period as theGroup. Adjustments are made where necessary to bring the accounting policies into line with those of MDC.

Adjustments are made in the consolidated financial statements to eliminate the Group’s share of unrealized gains andlosses on transactions between the Group and the joint venture. Losses on transactions are recognized immediatelyif the loss provides evidence of a reduction in the NRV of current assets or an impairment loss. The joint venture isproportionately consolidated until the date on which the Group ceases to have joint control over the joint venture.

The Group discontinues applying the equity method when its investment in an investee company is reduced to zero.Accordingly, additional losses are not recognized unless the Group has guaranteed certain obligations of the investeecompany. When the investee company subsequently reports profits, the Group resumes recognizing its share of theprofits only after its share of the profits equals the share of net losses not recognized during the period the equitymethod was suspended. The reporting dates of the investee companies and the Group are identical and the investeecompanies’ accounting policies conform to those used by the Group for like transactions and events in similarcircumstances.

Investment PropertiesInvestment properties consist of properties that are held to earn rentals, and are not occupied by the companies in theGroup. Investment properties, except for land, are carried at cost less accumulated depreciation and amortizationand any impairment in value. Land is carried at cost less any impairment in value.

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of theassets, regardless of utilization. The estimated useful lives of investment properties follow:

Land improvements 5 yearsBuildings 20-40 years

Investment properties are derecognized when either they have been disposed of or when the investment property ispermanently withdrawn from use and no future economic benefit is expected from its disposal. Any gain or loss onthe retirement or disposal of an investment property is recognized in the consolidated statement of income in the yearof retirement or disposal.

Transfers are made to investment property when there is a change in use, evidenced by ending of owner-occupation,commencement of an operating lease to another party or ending of construction or development. Transfers are madefrom investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale. Transfers between investment property,owner-occupied property and inventories do not change the carrying amount of the property transferred and they donot change the cost of the property for measurement or for disclosure purposes.

Property, Plant and EquipmentProperty, plant and equipment, except for land, are carried at cost less accumulated depreciation and amortizationand any impairment in value. Land is carried at cost less any impairment in value. The initial cost of property, plantand equipment consists of its construction cost or purchase price and any directly attributable costs of bringing theproperty, plant and equipment to its working condition and location for its intended use.

Construction-in-progress is stated at cost. This includes cost of construction and other direct costs. Construction-in-progress is not depreciated until such time that the relevant assets are completed and put into operational use.

Major repairs are capitalized as part of property, plant and equipment only when it is probable that future economicbenefits associated with the item will flow to the Group and the cost of the items can be measured reliably. All otherrepairs and maintenance are charged against current operations as incurred.

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96 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Depreciation and amortization of property, plant and equipment commences once the property, plant and equipmentare available for use and computed on a straight-line basis over the estimated useful lives of the property, plant andequipment as follows:

Buildings and improvements 3-40 yearsMachinery and equipment 3-10 yearsFurniture, fixtures and equipment 2-10 yearsTransportation equipment 3-5 years

Hotel property and equipment includes the following types of assets and their corresponding estimated useful lives:

Hotel buildings and improvements 30-50 yearsLand improvements 30 yearsLeasehold improvements 5-20 yearsFurniture, furnishing and equipment 5 yearsMachinery and equipment 5 yearsTransportation equipment 5 years

The assets residual values, useful lives and depreciation and amortization method are reviewed periodically to ensurethat the amounts, periods and method of depreciation and amortization are consistent with the expected pattern ofeconomic benefits from items of property, plant and equipment.

When property, plant and equipment are retired or otherwise disposed of, the cost and the related accumulateddepreciation and amortization and accumulated provision for impairment losses, if any, are removed from theaccounts and any resulting gain or loss is credited or charged against current operations.

Intangible AssetsIntangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assetsacquired in a business combination is the fair value as at the date of acquisition. Subsequently, intangible assets aremeasured at cost less accumulated amortization and provision for impairment loss, if any. The useful lives ofintangible assets with finite lives are assessed at the individual asset level. Intangible assets with finite lives areamortized over their useful lives on a straight line basis. Periods and method of amortization for intangible assets withfinite useful lives are reviewed annually or earlier when an indicator of impairment exists.

The estimated useful lives of intangible assets follow:

Customer relationships 2-5 yearsOrder backlog 6 monthsUnpatented technology 5 yearsDeveloped software 2 yearsLicenses 3 years

A gain or loss arising from derecognition of an intangible asset is measured as the difference between the netdisposal proceeds and the carrying amount of the intangible assets and is recognized in the consolidated statement ofincome when the intangible asset is derecognized.

Business Combinations and GoodwillBusiness combinations are accounted for using the purchase method. The cost of an acquisition is measured as thefair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange,plus costs directly attributable to the acquisition. Identifiable assets (including previously unrecognized intangibleassets) acquired and liabilities and contingent liabilities assumed in a business combination are measured initially attheir fair values at the date of acquisition, irrespective of the extent of any noncontrolling interest.

Goodwill is initially measured at cost being the excess of the cost of the business combination over the Group’s sharein the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the cost of theacquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directlyin the consolidated statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of theimpairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of theGroup’s cash-generating units (CGU) that are expected to benefit from the synergies of the combination, irrespective ofwhether other assets or liabilities of the acquiree are assigned to those units.

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2009 ANNUAL REPORT 97

Goodwill allocated to a CGU is included in the carrying amount of the CGU being disposed when determining the gainor loss on disposal. For partial disposal of operation within the CGU, the goodwill associated with the disposedoperation is included in the carrying amount of the operation when determining gain or loss on disposal and measuredon the basis of the relative values of the operation disposed of and the portion of the CGU retained, unless anothermethod better reflects the goodwill associated with the operation disposed of.

Impairment of Nonfinancial AssetsThe Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any suchindication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of theasset’s recoverable amount. An asset’s recoverable amount is calculated as the higher of the asset’s or CGU’s fairvalue less costs to sell and its value in use and is determined for an individual asset, unless the asset does notgenerate cash inflows that are largely independent of those from other assets or groups of assets. Where the carryingamount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to itsrecoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present valueusing a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specificto the asset. In determining fair value less cost to sell, an appropriate valuation model is used. These calculationsare corroborated by valuation multiples or other fair value indicators. Impairment losses of continuing operations arerecognized in the consolidated statement of income in those expense categories consistent with the function of theimpaired asset.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indicationthat previously recognized impairment losses may no longer exist or may have decreased. If such indication exists,the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been achange in the estimates used to determine the asset’s recoverable amount since the last impairment loss wasrecognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. Thatincreased amount cannot exceed the carrying amount that would have been determined, net of depreciation andamortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in theconsolidated statement of income unless the asset is carried at revalued amount, in which case the reversal is treatedas revaluation increase. After such a reversal, the depreciation and amortization charge is adjusted in future periodsto allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaininguseful life.

Investments in associates and jointly controlled entitiesAfter application of the equity method, the Group determines whether it is necessary to recognize any additionalimpairment loss with respect to the Group’s net investment in the investee company. The Group determines at eachreporting date whether there is any objective evidence that the investment in the investee company is impaired. If thisis the case, the Group calculates the amount of impairment as being the difference between the recoverable amountof the investee company and the carrying cost and recognizes the amount in the consolidated statement of income.

Impairment of goodwillFor assessing impairment of goodwill, a test for impairment is performed annually and when circumstances indicatethat the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amountof each CGU (or group of CGUs) to which the goodwill relates. Where the recoverable amount of the CGU is lessthan its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversedin future periods.

ProvisionsProvisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event,it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and areliable estimate can be made of the amount of the obligation.

Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but onlywhen the reimbursement is virtually certain. If the effect of the time value of money is material, provisions aredetermined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessmentsof the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, theincrease in the provision due to the passage of time is recognized as interest expense. Provisions are reviewed ateach reporting date and adjusted to reflect the current best estimate.

Treasury StockOwn equity instruments which are reacquired and held by the Company or by other companies of the consolidatedgroup are carried at cost and are deducted from equity. No gain or loss is recognized in profit or loss on thepurchase, sale, issue or cancellation of the Group’s own equity instruments. When the shares are retired, the capital

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98 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

stock account is reduced by its par value and the excess of cost over par value upon retirement is debited toadditional paid-in capital to the extent of the specific or average additional paid-in capital when the shares wereissued and to retained earnings for the remaining balance.

Revenue and Cost RecognitionRevenue and cost from sales of completed projects by real estate subsidiaries are accounted for using the full accrualmethod. The percentage of completion method is used to recognize income from sales of projects where thesubsidiaries have material obligations under the sales contracts to complete the project after the property is sold.Under this method, gain is recognized as the related obligations are fulfilled, measured principally on the basis of theestimated completion of a physical proportion of the contract work. Any excess of collections over the recognizedreceivables are included under “Other current liabilities” in the liabilities section of the consolidated statement offinancial position.

Revenue from construction contracts are recognized using the percentage of completion method, measuredprincipally on the basis of the estimated physical completion of the contract work.

Contract costs include all direct materials and labor costs and those indirect costs related to contract performance.Expected losses on contracts are recognized immediately when it is probable that the total contract costs will exceedtotal contract revenue. Changes in contract performance, contract conditions and estimated profitability, includingthose arising from contract penalty provisions, and final contract settlements which may result in revisions toestimated costs and gross margins are recognized in the year in which the changes are determined.

Rental income under noncancellable and cancellable leases on Investment properties is recognized in theconsolidated statement of income on a straight-line basis over the lease term and the terms of the lease, respectively,or based on a certain percentage of the gross revenue of the tenants, as provided under the terms of the leasecontract.

Marketing fees, management fees from administrative and property management are recognized when services arerendered.

Revenue from hotel operations are recognized when services are rendered. Revenue from banquets and otherspecial events are recognized when the events take place.

Revenue from sales of electronic products and vehicles are recognized when the significant risks and rewards ofownership of the goods have passed to the buyer and the amount of revenue can be measured reliably. Revenue ismeasured at the fair value of the consideration received excluding discounts, returns, rebates and sales taxes.

Revenue from business process outsourcing services is recognized based on per employee, per transaction or perhour basis and when services are rendered.

Interest income is recognized as it accrues using the effective interest method.

Dividend income is recognized when the Group’s right to receive payment is established.

Gain or loss is recognized in the consolidated statement of income if the Company disposes some of its investment ina subsidiary or associate. Gain or loss is computed as the difference between the proceeds of the disposal and itscarrying amount, including the carrying amount of goodwill, if any.

LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement atinception date of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets orthe arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one ofthe following applies: (a) there is a change in contractual terms, other than a renewal or extension of the arrangement;(b) a renewal option is exercised or extension granted, unless the term of the renewal or extension was initiallyincluded in the lease term; (c) there is a change in the determination of whether fulfillment is dependent on a specifiedasset; or (d) there is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change incircumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extensionperiod for scenario (b).

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2009 ANNUAL REPORT 99

Group as lesseeLeases where the lessor retains substantially all the risks and benefits of ownership of the consolidated asset areclassified as operating leases. Fixed lease payments are recognized as an expense in the consolidated statement ofincome on a straight-line basis while the variable rent is recognized as an expense based on terms of the leasecontract.

Finance leases, which transfer substantially all the risks and benefits incidental to ownership of the leased item, arecapitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of theminimum lease payments. Lease payments are apportioned between the finance charges and reduction of the leaseliability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges arecharged directly against income.

Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respectivelease terms.

Group as lessorLeases where the Group does not transfer substantially all the risk and benefits of ownership of the assets areclassified as operating leases. Lease payments received are recognized as income in the consolidated statement ofincome on a straight-line basis over the lease term. Initial direct costs incurred in negotiating operating leases areadded to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rentalincome. Contingent rent is recognized as revenue in the period in which it is earned.

Commission ExpenseCommissions paid to sales or marketing agents on the sale of pre-completed real estate units are deferred whenrecovery is reasonably expected and are charged to expense in the period in which the related revenue is recognizedas earned. Accordingly, when the percentage of completion method is used, commissions are likewise charged toexpense in the period the related revenue is recognized. Commission expense is included under “Cost of sales andservices” in the consolidated statement of income.

Borrowing CostsInterest and other financing costs incurred during the construction period on borrowings used to finance propertydevelopment are capitalized as part of development cost (included in real estate inventories, investment propertiesand property, plant and equipment). Capitalization of borrowing costs commences when the activities to prepare theasset are in progress and expenditures and borrowing costs are being incurred. The capitalization of these borrowingcosts ceases when substantially all the activities necessary to prepare the asset for its intended use or sale arecomplete. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded.Capitalized borrowing cost is based on the applicable weighted average borrowing rate from general borrowings andthe actual borrowing costs eligible for capitalization for funds borrowed specifically. All other borrowing costs areexpensed in the period they occur.

Pension CostPension cost is actuarially determined using the projected unit credit method. This method reflects services renderedby employees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries.Actuarial valuations are conducted with sufficient regularity, with option to accelerate when significant changes tounderlying assumptions occur. Pension cost includes current service cost, interest cost, expected return on any planassets, actuarial gains and losses and the effect of any curtailments or settlements.

The net pension liability recognized in the consolidated statement of financial position in respect of the defined benefitpension plans is the present value of the defined benefit obligation at the reporting date less the fair value of the planassets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit creditmethod. The present value of the defined benefit obligation is determined by using risk-free interest rates ofgovernment bonds that have terms to maturity approximating the terms of the related pension liabilities or applying asingle weighted average discount rate that reflects the estimated timing and amount of benefit payments.

The net pension asset is the lower of the fair value of the plan assets less the present value of the defined benefitobligation at the reporting date, together with adjustments for unrecognized actuarial gains or losses and past servicecosts that shall be recognized in future periods, or the total of any cumulative unrecognized net actuarial losses andpast service cost and the present value of any economic benefits available in the form of refunds from the plan orreductions in the future contributions to the plan.

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100 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Actuarial gains and losses are recognized as income or expense if the cumulative unrecognized actuarial gains andlosses at the end of the previous reporting period exceeded the greater of 10% of the present value of defined benefitobligation or 10% of the fair value of plan assets. These gains or losses are recognized over the expected averageremaining working lives of the employees participating in the plans.

Income TaxCurrent taxCurrent tax assets and liabilities for the current and prior periods are measured at the amount expected to berecovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are thosethat are enacted or substantively enacted by the statement of financial position date.

Deferred taxDeferred income tax is provided, using the liability method, on all temporary differences, with certain exceptions, atthe reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reportingpurposes.

Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions. Deferred taxassets are recognized for all deductible temporary differences, carryforward benefit of unused tax credits from excessof minimum corporate income tax (MCIT) over the regular corporate income tax and unused net operating losscarryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductibletemporary differences and carryforward benefits of MCIT and NOLCO can be utilized.

Deferred tax liabilities are not provided on nontaxable temporary differences associated with investments in domesticsubsidiaries, associates and interests in jointly controlled entities. With respect to investments in foreign subsidiaries,associates and interests in jointly controlled entities, deferred tax liabilities are recognized except where the timing ofthe reversal of the temporary difference can be controlled and it is probable that the temporary difference will notreverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is nolonger probable that sufficient taxable income will be available to allow all as part of the deferred tax assets to beutilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extentthat it has become probable that future taxable income will allow all as part of the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rate that is expected to apply to the period when the assetis realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enactedreporting date. Movements in the deferred income tax assets and liabilities arising from changes in tax rates arecharged or credited to income for the period.

Income tax relating to items recognized directly in equity is recognized in equity.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current taxassets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxationauthority.

Foreign Currency TransactionsThe functional and presentation currency of Ayala Corporation and its Philippine subsidiaries (except for BHL, AIVPLand IMI), is the Philippine Peso (P=). Each entity in the Group determines its own functional currency and itemsincluded in the financial statements of each entity are measured using that functional currency. Transactions inforeign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchangeruling at the reporting date. All differences are taken to the consolidated statement of income with the exception ofdifferences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. Theseare recognized in the consolidated statement of comprehensive income until the disposal of the net investment, atwhich time they are recognized in the consolidated statement of income. Tax charges and credits attributable toexchange differences on those borrowings are also dealt with in equity. Nonmonetary items that are measured interms of historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction.Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rate at the datewhen the fair value was determined.

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2009 ANNUAL REPORT 101

The functional currency of BHL, AIVPL and IMI is the US Dollar ($). As at the reporting date, the assets and liabilitiesof these subsidiaries are translated into the presentation currency of the Group at the rate of exchange ruling atthereporting date and their statement of income accounts are translated at the weighted average exchange rates forthe year. The exchange differences arising on the translation are recognized in the consolidated statement ofcomprehensive income and reported as a separate component of equity. On disposal of a foreign entity, the deferredcumulative amount recognized in the consolidated statement of comprehensive income relating to that particularforeign operation shall be recognized in the consolidated statement of income.

The Group’s share in the associates’ translation adjustments are likewise included under the cumulative translationadjustments account in the consolidated statement of comprehensive income.

Share-based PaymentsThe Group have equity-settled, share-based compensation plans with its employees.

PFRS 2 OptionsFor options granted after November 7, 2002 that have not vested on or before January 1, 2005, the cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted.In valuing equity-settled transactions, vesting conditions, including performance conditions, other than marketconditions (conditions linked to share prices), shall not be taken into account when estimating the fair value of theshares or share options at the measurement date. Instead, vesting conditions are taken into account in estimating thenumber of equity instruments that will ultimately vest. Fair value is determined by using the Black-Scholes model,further details of which are provided in Note 26 to the consolidated financial statements.

The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the periodin which the performance conditions are fulfilled, ending on the date on which the relevant employees become fullyentitled to the awards (‘vesting date’). The cumulative expense recognized for equity-settled transactions at eachreporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s bestestimate of the number of equity instruments that will ultimately vest. The income or expense for a period representsthe movement in cumulative expense recognized as at the beginning and end of that period.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upona market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized as if the terms hadnot been modified. In addition, an expense is recognized for any increase in the value of the transaction as a result ofthe modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and anyexpense not yet recognized for the award is recognized immediately.

However, if a new award is substituted for the cancelled award, and designated as a replacement award on the datethat it is granted, the cancelled and new awards are treated as if they were a modification of the original award, asdescribed in the previous paragraph.

Pre-PFRS 2 OptionsFor options granted before November 7, 2002 that have vested before January 1, 2005, the intrinsic value of stockoptions determined as of grant date is recognized as expense over the vesting period.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earningsper share (see Note 24).

Employee share purchase plansThe Company and some of its subsidiaries have employee share purchase plans (ESOWN) which allow the granteesto purchase the Company’s and its respective subsidiaries’ shares at a discounted price. The Group recognizes thedifference between the market price at the time of subscription and the subscription price as stock compensationexpense over the holding period.

Where the subscription receivable is payable over more than one year, the subscription price is adjusted for the timevalue and treated as additional stock compensation expense. For the unsubscribed shares where the employees stillhave the option to subscribe in the future, these are accounted for as options.

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102 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Earnings Per ShareBasic earnings per share (EPS) is computed by dividing net income attributable to common equity holders by theweighted average number of common shares issued and outstanding during the year and adjusted to give retroactiveeffect to any stock dividends declared during the period. Diluted EPS is computed by dividing net income attributableto common equity holders by the weighted average number of common shares issued and outstanding during theyear plus the weighted average number of common shares that would be issued on conversion of all the dilutivepotential common shares. The calculation of diluted earnings per share does not assume conversion, exercise orother issue of potential common shares that would have an antidilutive effect on earnings per share.

Operating SegmentsThe Group’s operating businesses are organized and managed separately according to the nature of the productsand services provided, with each segment representing a strategic business unit that offers different products andserves different markets. Financial information on operating segments is presented in Note 27 to the consolidatedfinancial statements.

ContingenciesContingent liabilities are not recognized in the consolidated financial statements. These are disclosed unless thepossibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognizedin the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

Events after the Reporting PeriodPost year-end events that provide additional information about the Group’s position at the reporting date (adjustingevents) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events aredisclosed in the consolidated financial statements when material.

3. Significant Accounting Judgments and Estimates

The preparation of the accompanying consolidated financial statements in conformity with PFRS requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. The estimates and assumptions used in the accompanying consolidatedfinancial statements are based upon management’s evaluation of relevant facts and circumstances as of the date ofthe consolidated financial statements. Actual results could differ from such estimates.

JudgmentsIn the process of applying the Group’s accounting policies, management has made the following judgments, apartfrom those involving estimations, which have the most significant effect on the amounts recognized in theconsolidated financial statements:

Operating lease commitments - Group as lessorThe Group has entered into commercial property leases on its investment property portfolio. The Group hasdetermined that it retains all significant risks and rewards of ownership of these properties as the Group consideredamong others the length of the lease term is compared with the estimated useful life of the assets.

A number of the Group’s operating lease contracts are accounted for as noncancellable operating leases and the restare cancellable. In determining whether a lease contract is cancellable or not, the Company considers among others,the significance of the penalty, including the economic consequence to the lessee.

Operating lease commitments - Group as lesseeThe Group has entered into a contract with Bases Conversion Development Authority (BCDA) to develop, under alease agreement, a mall on a 9.8-hectare lot inside Fort Bonifacio. The Group has determined that all significant risksand rewards of ownership of these properties are retained by the lessor.

Distinction between investment properties and owner-occupied propertiesThe Group determines whether a property qualifies as investment property. In making its judgment, the Groupconsiders whether the property generates cash flows largely independent of the other assets held by an entity.Owner-occupied properties generate cash flows that are attributable not only to property but also to the other assetsused in the production or supply process.

Some properties comprise a portion that is held to earn rentals or for capital appreciations and another portion that isheld for use in the production or supply of goods or services or for administrative purposes. If these portions cannot

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2009 ANNUAL REPORT 103

be sold separately as of reporting date, the property is accounted for as investment property only if an insignificantportion is held for use in the production or supply of goods or services or for administrative purposes. Judgment isapplied in determining whether ancillary services are so significant that a property does not qualify as investmentproperty. The Group considers each property separately in making its judgment.

Distinction between real estate inventories and land and improvementsThe Group determines whether a property will be classified as real estate inventories or land and improvements. Inmaking this judgment, the Group considers whether the property will be sold in the normal operating cycle (Realestate inventories) or whether it will be retained as part of the Group’s strategic landbanking activities for developmentor sale in the medium or long-term (Land and improvements).

HTM investmentsThe classification of HTM investments requires significant judgment. In making this judgment, the Group evaluates itsintention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturityother than in certain specific circumstances, it will be required to reclassify the entire portfolio as AFS financial asset.The investments would therefore be measured at fair value and not at amortized cost.

Impairment of AFS equity investmentsThe Group treats AFS equity investments as impaired when there has been a significant or prolonged decline in thefair value below its cost or where other objective evidence of impairment exists. The determination of what is‘significant’ or ‘prolonged’ requires judgment. The Group treats ‘significant’ generally as 20% or more and ‘prolonged’as greater than 6 months for quoted equity securities. In addition, the Group evaluates other factors, including normalvolatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Financial assets not quoted in an active marketThe Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an activemarket. Included in the evaluation on whether a financial asset is quoted in an active market is the determination onwhether quoted prices are readily and regularly available, and whether those prices represent actual and regularlyoccurring market transactions on an arm’s length basis.

ContingenciesThe Group is currently involved in various legal proceedings. The estimate of the probable costs for the resolution ofthese claims has been developed in consultation with outside counsel handling the defense in these matters and isbased upon an analysis of potential results. The Group currently does not believe that these proceedings will have amaterial effect on the Group’s financial position (see Note 34).

Management’s Use of EstimatesThe key assumptions concerning the future and other sources of estimation uncertainty at the reporting date that havea significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the nextfinancial year are discussed below.

Revenue and cost recognitionALI Group’s revenue recognition policies require management to make use of estimates and assumptions that mayaffect the reported amounts of revenue and costs. ALI Group’s revenue from real estate and construction contractsare recognized based on the percentage of completion measured principally on the basis of the estimated completionof a physical proportion of the contract work, and by reference to the actual costs incurred to date over the estimatedtotal costs of the project.

Estimating allowance for impairment lossesThe Group maintains allowance for doubtful accounts based on the result of the individual and collective assessmentunder PAS 39. Under the individual assessment, the Group is required to obtain the present value of estimated cashflows using the receivable’s original effective interest rate. Impairment loss is determined as the difference betweenthe receivable’s carrying balance and the computed present value. Factors considered in individual assessment arepayment history, past due status and term. The collective assessment would require the Group to group itsreceivables based on the credit risk characteristics (customer type, payment history, past-due status and term) of thecustomers. Impairment loss is then determined based on historical loss experience of the receivables grouped percredit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effectsof current conditions that did not affect the period on which the historical loss experience is based and to remove theeffects of conditions in the historical period that do not exist currently. The methodology and assumptions used forthe individual and collective assessments are based on management's judgment and estimate. Therefore, theamount and timing of recorded expense for any period would differ depending on the judgments and estimates madefor the year.

31

104 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

As of December 31, 2009 and 2008, allowance for impairment losses amounted to P=373.0 million andP=357.8 million, respectively. Accounts and notes receivable, net of allowance for doubtful accounts, amounted toP=27.9 billion and P=30.0 billion as of December 31, 2009 and 2008, respectively (see Note 6).

Evaluation of net realizable value of inventoriesInventories are valued at the lower of cost or NRV. This requires the Group to make an estimate of the inventories’estimated selling price in the ordinary course of business, cost of completion and costs necessary to make a sale todetermine the NRV. For real estate inventories, the Group adjusts the cost of its real estate inventories to netrealizable value based on its assessment of the recoverability of the inventories. In determining the recoverability ofthe inventories, management considers whether those inventories are damaged or if their selling prices havedeclined. Likewise, management also considers whether the estimated costs of completion or the estimated costs tobe incurred to make the sale have increased. In the event that NRV is lower than the cost, the decline is recognizedas an expense. The amount and timing of recorded expenses for any period would differ if different judgments weremade or different estimates were utilized. Inventories carried at cost amounted to P=9.0 billion and P=8.2 billion as ofDecember 31, 2009 and 2008, respectively. Inventories carried at NRV amounted to P=1.8 billion as of December 31,2009 and 2008 (see Note 7).

Evaluation of impairment of nonfinancial assetsThe Group reviews investments in associates and jointly controlled entities, investment properties, property, plant andequipment and intangible assets for impairment of value. Impairment for goodwill is assessed at least annually. Thisincludes considering certain indications of impairment such as significant changes in asset usage, significant declinein assets’ market value, obsolescence or physical damage of an asset, plans in the real estate projects, significantunderperformance relative to expected historical or projected future operating results and significant negative industryor economic trends.

The Group estimates the recoverable amount as the higher of the net selling price and value in use. In determiningthe present value of estimated future cash flows expected to be generated from the continued use of the assets, theGroup is required to make estimates and assumptions that may affect investments in associates and jointly controlledentities, investment properties, property, plant and equipment and intangible assets.

For goodwill, this requires an estimation of the recoverable amount which is the net selling price or value in use of thecash-generating units to which the goodwill is allocated. Estimating a value in use amount requires management tomake an estimate of the expected future cash flows for the cash generating unit and also to choose a suitablediscount rate in order to calculate the present value of cash flows.

The Group’s impairment tests for goodwill are based on value in use and fair value less cost to sell calculations. Thevalue in use calculations in 2009 and 2008 used a discounted cash flow model. The cash flows are derived from thebudget for the next five years and assume a steady growth rate. The recoverable amount is most sensitive todiscount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rateused for extrapolation purposes. The fair value less cost to sell calculation in 2009 considered the enterprise value ofthe CGU based on a recent tender offer to which the goodwill is allocated.

In determining the amount of impaired goodwill in 2007, the Group determined the recoverable amount of theinvestment in a subsidiary based on the estimated net selling price of the cash generating unit to which the goodwill isallocated. The excess of the carrying amount of the investment over the estimated net selling price is allocated first tothe goodwill, resulting in an impairment loss of P=662.6 million (see Note 14).

Investments in associates and jointly controlled entities, investment properties, property, plant and equipment andintangible assets amounted to P=113.0 billion and P=107.2 billion as of December 31, 2009 and 2008, respectively(see Notes 10, 12, 13 and 14).

Estimating useful lives of investment properties, property, plant and equipment, and intangible assetsThe Group estimated the useful lives of its investment properties, property, plant and equipment and intangible assetswith finite useful lives based on the period over which the assets are expected to be available for use. The estimateduseful lives of investment properties, property, plant and equipment and intangible assets are reviewed at leastannually and are updated if expectations differ from previous estimates due to physical wear and tear and technical orcommercial obsolescence on the use of these assets. It is possible that future results of operations could bematerially affected by changes in these estimates brought about by changes in factors mentioned above. A reductionin the estimated useful lives would increase depreciation and amortization expense and decrease noncurrent assets.

Investment properties, property, plant and equipment and intangible assets with finite useful lives amounted toP=37.5 billion and P=35.8 billion as of December 31, 2009 and 2008, respectively (see Notes 12, 13 and 14).

32

2009 ANNUAL REPORT 105

Deferred tax assetsThe Group reviews the carrying amounts of deferred income taxes at each reporting date and reduces deferred taxassets to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part ofthe deferred tax assets to be utilized. However, there is no assurance that the Group will generate sufficient taxableincome to allow all or part of deferred tax assets to be utilized. The Group looks at its projected performance inassessing the sufficiency of future taxable income.

As of December 31, 2009 and 2008, the Group has net deferred tax assets amounting to P=1,396.0 million andP=1,132.8 million, respectively and net deferred tax liabilities amounting to P=207.4 million and P=185.5 million,respectively (see Note 23).

Share-based paymentsThe expected life of the options is based on the expected exercise behavior of the stock option holders and is notnecessarily indicative of the exercise patterns that may occur. The volatility is based on the average historical pricevolatility which may be different from the expected volatility of the shares of stock of the Group.

Total expense arising from share-based payments recognized by the Group amounted to P=471.6 million in 2009,P=342.9 million in 2008 and P=288.0 million in 2007.

Estimating pension obligation and other retirement benefitsThe determination of the Group’s obligation and cost of pension and other retirement benefits is dependent on theselection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described inNote 25 to the consolidated financial statements and include among others, discount rates, expected returns on planassets and rates of salary increase. While the Group believes that the assumptions are reasonable and appropriate,significant differences in the actual experience or significant changes in the assumptions materially affect retirementobligations. See Note 25 to the consolidated financial statements for the related balances.

Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded in the consolidated statement of financialposition or disclosed in the notes to the consolidated financial statements cannot be derived from active markets, theyare determined using internal valuation techniques using generally accepted market valuation models. The inputs tothese models are taken from observable markets where possible, but where this is not feasible, estimates are used inestablishing fair values. These estimates may include considerations of liquidity, volatility, and correlation. Certainfinancial assets and liabilities were initially recorded at fair values by using the discounted cash flow method. SeeNotes 6, 8, 11, 19 and 30 for the related balances.

Purchase price allocation2009 AcquisitionAs of December 31, 2009, the purchase price allocation relating to the Group’s acquisition of Grail Research, Inc.(Grail) has been prepared on a preliminary basis. The provisional fair values of the assets acquired and liabilitiesassumed as of date of acquisition were based on the net book values of the identifiable assets and liabilities sincethese approximate the fair values. The difference between the total consideration and the net assets amounting toP=550.5 million was initially allocated to goodwill as of December 31, 2009.

2008 AcquisitionAs of December 31, 2008, the purchase price allocation relating to the Group’s acquisition of Datum Legal, Inc.(Datum) has been prepared on a preliminary basis. In 2009, purchased price allocation of Datum was finalized andthere were no significant changes to the fair values of the assets acquired and liabilities assumed.

As of December 31, 2008, the purchase price allocation relating to the Group’s acquisition of ALI Property PartnersHoldings Company (APPHC) and ALI Property Partners Corporation (APPCo.) has been prepared on a preliminarybasis. In 2009, the Group finalized its purchased price allocation and the 2008 comparative information has beenrestated to reflect adjustments to the fair values of investment properties and property, plant and equipment.

33

106 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

4. Cash and Cash Equivalents

This account consists of the following:

2009 2008(In Thousands)

Cash on hand and in banks P=3,960,792 P=3,772,560Cash equivalents 41,696,097 39,113,232

P=45,656,889 P=42,885,792

Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents are short-term, highly liquidinvestments that are made for varying periods of up to three months depending on the immediate cash requirementsof the Group and earn interest at the prevailing short-term rates.

5. Short-term Investments

Short-term investments pertain to money market placements made for varying periods of more than three months andup to six months and earn interest at the respective short-term investment rates.

The ranges of interest rates of the short-term investments follow:

2009 2008PHP 4.0% to 4.8% 5.3% to 7.1%US$ 1.9% to 4.8% 3.5% to 4.8%

6. Accounts and Notes Receivable

This account consists of the following:

2009 2008(In Thousands)

Trade:Real estate P=13,011,442 P=10,565,254Electronics manufacturing 3,881,439 3,152,168Information technology and business process

outsourcing (BPO) 877,188 352,084Automotive 849,301 665,670International and others 3,803 64,074

Related parties (Note 29) 3,390,161 7,869,143Advances to other companies 2,888,665 3,643,843Advances to contractors and suppliers 2,604,816 2,496,665Investment in bonds classified as loans and

receivables 200,000 –Others 556,589 1,526,961

28,263,404 30,335,862Less allowance for doubtful accounts 372,982 357,831

27,890,422 29,978,031Less noncurrent portion 2,657,623 6,694,021

P=25,232,799 P=23,284,010

The classes of trade receivables of the Group follow:

Real estateReal estate receivables are receivables relating to residential development which pertain to receivables from the saleof high-end; upper middle-income and affordable residential lots and units and leisure community developments;construction contracts which pertain to receivables from third party construction projects; shopping centers whichpertain to lease receivables of retail space; corporate business which pertain to lease receivables of office and factorybuildings and receivables from the sale of office buildings and industrial lots; and management fees which pertain tofacility management fees receivable.

34

2009 ANNUAL REPORT 107

The sales contracts receivable, included in real estate receivables, are collectible in monthly installments over aperiod of one to ten years and bear annual interest rates ranging from 2.5% to 18.0% computed on the diminishingbalance of the principal. Titles to real estate properties are not transferred to the buyers until full payment has beenmade.

Electronics manufacturingElectronics manufacturing receivables pertain to receivables arising from manufacturing and other related services forelectronic products and components and collectible within 30 to 60 days from invoice date.

Information technology and BPOInformation technology and BPO receivables arose from venture capital for technology businesses; provision of value-added content for wireless services, online business-to-business and business-to-consumer services; electroniccommerce; technology infrastructure sales and technology services; and onshore- and offshore-BPO services and arenormally collected within 30 to 60 days of invoice date.

AutomotiveAutomotive receivables are receivables relating to manufacture and sale of passenger cars and commercial vehiclesand are collectible within 30- to 90- days from date of sale.

International and othersInternational and other receivables arose from investments in overseas property companies and projects, charterservices, agri-business and others and are generally on 30 to 60 day terms.

The nature of the Group’s other receivables follows:

Receivables from related parties and advances to other companiesReceivables from related parties include notes receivable issued to related parties which are interest- bearing andpayable based on the terms of the notes. Advances to other companies are due and demandable.

Advances to contractors and suppliersAdvances to contractors and suppliers are recouped every progress billing payment date depending on thepercentage of accomplishment.

Investment in bonds classified as loans and receivablesInvestment in bonds classified as loans and receivables pertain to ALI’s investment in Land Bank of the Philippines’s(LBP’s) 7.25% unsecured subordinated notes due 2019, callable with step-up interest in 2014. Fitch Ratingsassigned a National Long-term rating of AA (phl) to LBP.

OthersOther receivables include accrued interest receivable, receivable from employees and other nontrade receivables.

Movements in the allowance for doubtful accounts follow (in thousands):

2009

Real EstateElectronics

Manufacturing Automotive

InformationTechnology

and BPOInternational

and Others Others TotalAt January 1 P=136,729 P=36,277 P=26,324 P=19,120 P=61,160 P=78,221 P=357,831Provisions during the year (Note 21) 84,492 7,625 4,127 58,886 25,491 36,587 217,208Write-offs (5,878) (18,323) – (85) (58,322) (9,778) (92,386)Reversals (12,533) (11,143) – (516) (28,226) (57,253) (109,671)At December 31 P=202,810 P=14,436 P=30,451 P=77,405 P=103 P=47,777 P=372,982Individually impaired P=178,618 P=14,436 P=30,451 P=77,405 P=103 P=36,033 P=337,046Collectively impaired 24,192 – – – – 11,744 35,936Total P=202,810 P=14,436 P=30,451 P=77,405 P=103 P=47,777 P=372,982Gross amount of loans and

receivables individuallydetermined to be impaired P=178,618 P=14,436 P=30,451 P=77,405 P=103 P=36,033 P=337,046

35

108 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

2008

Real EstateElectronics

Manufacturing Automotive

InformationTechnology

and BPOInternationaland Others Others Total

At January 1 P=119,508 P=31,180 P=26,107 P=18,261 P=61,160 P=83,130 P=339,346Provisions during the year (Note 21) 61,526 7,256 217 5,866 – 14,006 88,871Write-offs (44,305) – – – – – (44,305)Reversals – (2,159) – (5,007) – (18,915) (26,081)At December 31 P=136,729 P=36,277 P=26,324 P=19,120 P=61,160 P=78,221 P=357,831Individually impaired P=82,628 P=36,277 P=217 P=19,120 P=60,134 P=75,160 P=273,536Collectively impaired 54,101 – 26,107 – 1,026 3,061 84,295Total P=136,729 P=36,277 P=26,324 P=19,120 P=61,160 P=78,221 P=357,831Gross amount of loans and

receivables individuallydetermined to be impaired P=83,124 P=36,277 P=217 P=19,120 P=60,134 P=122,221 P=321,093

As of December 31, 2009 and 2008, certain receivables with a nominal amount of P=12,502.9 million andP=14,720.2 million, respectively, were recorded initially at fair value. The fair value of the receivables was obtained bydiscounting future cash flows using the applicable rates of similar types of instruments. The unamortized discountamounted to P=1,766.0 million and P=843.4 million as of December 31, 2009 and 2008, respectively.

In April 2009 and November 2008, ALI Group entered into agreements with certain financial institutions for the sale ofreal estate receivables without recourse amounting to P=1,193.9 million and P=1,537.0 million at average discount ratesranging from 8.3% to 9.8% and 6.4%, respectively. The discount on these receivables amounting to P=40.6 millionand P=103.8 million as of December 31, 2009 and 2008, respectively, has been included under “Other charges” in theconsolidated statement of income.

Other receivables include IMI’s insurance claim amounting to US$5.6 million (P=258.7 million) for damages toequipment and inventories caused by a fire incident in IMI’s plant in Cebu, Philippines in May 2009. The gain fromthe insurance claim is included under “Other income” in the consolidated statement of income (see Note 21).

7. Inventories

This account consists of the following:

2009 2008(In Thousands)

Real estate inventories:Subdivision land for sale

At cost P=4,230,063 P=3,156,622At NRV 524,158 608,955

Condominium, residential and commercial units forsale - at cost 3,521,952 3,681,273

Club shares - at cost 242,320 281,022Materials, supplies and others - at NRV (cost of

P=1,473,369 in 2009 and P=1,650,194 in 2008) 1,215,129 1,122,616Work-in-process - at cost 253,622 344,240Vehicles - at cost 398,849 265,478Finished goods - at cost 222,446 268,958Parts and accessories - at NRV (cost of P=124,925 in 2009

and P=135,296 in 2008) 96,691 108,576Construction materials - at cost 91,818 173,615

P=10,797,048 P=10,011,355

Inventories recognized as cost of sales amounted to P=34.3 billion, P=34.4 billion and P=30.2 billion in 2009, 2008 and2007, respectively, and were included under costs of sales and services in the consolidated statement of income(see Note 21).

The Group recorded a provision for impairment amounting to P=78.1 million and P=136.6 million in 2009 and 2008. Theprovision is included under “Other charges” in the consolidated statement of income (see Note 21).

In May 2009, IMI lost inventories amounting to US$0.6 million (P=27.7 million), due to a fire incident in its plant inCebu, Philippines. The loss is included under “General and administrative expenses” in the consolidated statement ofincome (see Note 21).

36

2009 ANNUAL REPORT 109

8. Other Current Assets

This account consists of the following:

2009 2008(In Thousands)

Prepaid expenses P=1,808,813 P=1,845,997Value-added input tax 1,426,839 1,102,560Financial assets at FVPL 926,860 2,233,201Treasury bills (Note 11) 925,694 –Creditable withholding tax 914,243 1,209,148HTM investments – 65,405Others 544,555 634,083

P=6,547,004 P=7,090,394

Financial assets at FVPL consist of:

2009 2008(In Thousands)

Held for trading:Government securities P=433,821 P=1,778,720

Designated as at FVPL:Investment securities 493,039 454,481

P=926,860 P=2,233,201

Government securities pertain to treasury bonds that have yields to maturity of 4.2% to 4.8% in 2009 and 5.5% to6.4% in 2008. The Group recognized unrealized loss on these government securities amounting to P=0.7 million in2009, P=3.9 million in 2008 and unrealized gain of P=18.0 million in 2007 (see Note 21). The Group recognizedrealized gains on disposal amounting to P=25.2 million and P=1.1 million in 2009 and 2008, respectively (see Note 21).

Investment securities pertain mostly to the Group’s investment in The Rohatyn Group (TRG) Allocation LLC, whichhas a fair value of US$9.4 million (P=448.2 million) as of December 31, 2008. Unrealized gains on this investmentamounted to US$0.3 million (P=14.7 million) and US$2.9 million (P=119.5 million) in 2009 and 2008, respectively (seeNote 21). In 2009, management evaluated the continued application of prior year’s valuation technique on the TRGinvestment. It was concluded that there is no reliable measure of fair value for the TRG investments as of December31, 2009 and it should be stated at cost with its last obtainable fair value as the new cost basis.

Prepaid expenses mainly include prepayments for commissions, marketing fees, advertising and promotion, taxesand licenses, rentals and insurance.

The value-added input tax is applied against value-added output tax. The remaining balance is recoverable in futureperiods.

HTM investments in 2008 pertain to fixed rate treasury notes that bear an effective interest rate of 11.4% whichmatured on February 25, 2009.

Freestanding derivativesIn 2009, IMI entered into various short-term currency forwards with aggregate nominal amount of $27.64 million. In2008, IMI entered into structured currency options for economic hedges which it unwound in the second quarter of2008 (see Note 21). The remaining outstanding structured currency options after the unwinding program havematurity dates of up to November 2008.

As of December 31, 2009 and 2008, IMI has no outstanding derivative transactions.

37

110 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Fair Value Changes on DerivativesThe net movements in fair values of the Group’s freestanding derivative instruments as of December 31 follow(amounts in thousands):

2009 2008Balance at beginning of year P=– P=143,322Net changes in fair value of derivatives

not designated as accounting hedges 7,665 (1,448,978)7,665 (1,305,656)

Fair value of settled instruments (7,665) 1,305,656Balance at end of year P=– P=–

The net changes in fair value of derivatives not designated as accounting hedges include hedging losses amountingto P=1,456 million in 2008 included under “Interest expense and other financing charges” and fair value gain amountingto P=7.7 million and P=7.0 million in 2009 and 2008, respectively, included as part of “Marked-to-market gain” under“Other income” account in the consolidated statement of income (see Note 21).

9. Land and Improvements

This account consists of:

2009 2008(In Thousands)

CostBalance at beginning of the year P=15,974,474 P=16,418,181Additions 3,396,777 145,544Transfers* (804,954) (588,841)Write-offs (Note 21) (202,983) –Disposals – (410)Balance at end of the year 18,363,314 15,974,474Allowance for decline in valueBalance at beginning of the year 217,580 217,580Additions 568,672 –Transfers* (5,500) –Balance at end of the year 780,752 217,580

P=17,582,562 P=15,756,894*Transfers pertain to developed land for sale and included under “Real estate inventories” account.

On August 27, 2009, ALI and the National Housing Authority (NHA) signed a Joint Venture Agreement to develop a29.1-hectare North Triangle Property in Quezon City as a priming project of the government and the private sector.The joint venture represents the conclusion of a public bidding process conducted by the NHA which began lastOctober 3, 2008.

ALI’s proposal, which has been approved and declared by the NHA as compliant with the Terms of Reference of thepublic bidding and the National Economic Development Authority (NEDA) Joint Venture Guidelines, features thedevelopment of a new Central Business District (CBD) in Quezon City. The CBD will be developed as the Philippines’first transit-oriented mixed-use central business district that will be a new nexus of commercial activity. The proposalalso aims to benefit the NHA in achieving its mandate of providing housing for informal settlers and transforming anon-performing asset in a model for urban renewal. The development will also generate jobs and revenues both forthe local and national governments.

ALI's vision for the property is consistent with the mandate of the Urban Triangle Development (TriDev) Commissionto rationalize and speed up the development of the East and North Triangles of Quezon City into well-planned,integrated and environmentally balanced, mixed-use communities. The joint venture also conforms to NHA's vision ofa private sector-led and managed model for the development of the property, similar to the development experiencein Fort Bonifacio.

The total project cost is estimated at P=22 billion, inclusive of future development costs and the current value of theproperty, which ALI and the NHA will contribute as their respective equity share in the joint venture. ALI expects tostart the development within the next two years.

38

2009 ANNUAL REPORT 111

In 2009, the Group recorded provision for impairment amounting P=568.7 million. The amount of impairment has beenincluded under “Other charges” in the consolidated statement of income (see Note 21).

10. Investments in Associates and Jointly Controlled Entities

This account consists of the following:

2009 2008(In Thousands)

Acquisition cost P=54,906,614 P=52,426,662Accumulated equity in earnings 15,991,568 15,488,891Cumulative translation adjustments and equity

reserves 658,770 224,841P=71,556,952 P=68,140,394

The Group’s equity in the net assets of its associates and jointly controlled entities and the related percentages ofownership are shown below:

Percentage of Ownership Carrying Amounts2009 2008 2009 2008

Domestic: (In Millions)Bank of the Philippine Islands and subsidiaries

(BPI) 33.5** 33.5** P=29,406 P=28,533Globe Telecom, Inc. and subsidiaries (Globe)* 30.5 30.5 17,313 18,000Stream Global Services, Inc. (Stream) 25.7 – 4,879 –Manila Water Company, Inc. and subsidiaries

(MWCI)* 31.5** 29.9** 4,308 3,188Emerging City Holdings, Inc. (ECHI)* 50.0 50.0 3,371 2,823Cebu Holdings, Inc. and subsidiaries (CHI) 47.2 47.2 1,972 1,940Bonifacio Land Corporation (BLC) 5.0 5.0 1,465 1,118Berkshires Holdings, Inc. (BHI)* 50.0 50.0 1,445 1,210Philwater Holdings Company, Inc. (Philwater)* 60.0 60.0 1,430 1,193North Triangle Depot Commercial Corporation

(NTDCC) 49.0 49.0 1,417 1,555Asiacom Philippines, Inc. (Asiacom)* 60.0 60.0 887 843Alabang Commercial Corporation (ACC)* 50.0 50.0 609 595EGS Corporation (EGS Corp.)* – 50.0 – 3,346

Foreign:ARCH Asian Partners L.P. 19.2** 19.2** 1,437 959

Others Various Various 1,618 2,837P=71,557 P=68,140

* Jointly controlled entities.** Effective ownership interest of the Company.

The fair value of investments in listed associates and jointly controlled entities for which there are published pricequotations amounted to P=104,803.2 million and P=79,767.2 million as of December 31, 2009 and 2008, respectively.

Financial information on significant associates and jointly controlled entities (amounts in millions, except earnings pershare figures) follows:

BPI 2009 2008Total resources P=724,420 P=666,612Total liabilities 656,655 602,740Noncontrolling interest 967 938Net interest income 21,402 19,463Other income 12,993 10,321Other expenses 19,676 18,312Net income attributable to:

Equity holders of the bank 8,516 6,423Noncontrolling interests 149 134

Earnings per shareBasic 2.62 1.98Diluted 2.62 1.98

39

112 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Globe 2009 2008Current assets P=18,415 P=17,541Noncurrent assets 109,228 102,202Total assets 127,643 119,743Current liabilities 33,576 33,728Noncurrent liabilities 46,359 35,923Total liabilities 79,935 69,651Net operating revenue 65,807 65,964Costs and expenses 47,834 48,118Net income 12,569 11,276Earnings per share:

Basic 94.59 84.75Diluted 94.31 84.61

MWCI 2009 2008Current assets P=9,178 P=8,595Noncurrent assets 34,580 27,774Total assets 43,758 36,369Current liabilities 5,427 4,231Noncurrent liabilities 21,361 17,680Total liabilities 26,788 21,911Revenue 9,533 8,914Costs and expenses 4,686 4,396Net income 3,231 2,788Earnings per share:

Basic 1.31 1.13Diluted 1.31 1.13

Stream 2009In US$ In Php*

Current assets US$227 P=10,505Noncurrent assets 453 20,949Total assets 680 31,454Current liabilities 115 5,329Noncurrent liabilities 262 12,108Total liabilities 377 17,437Revenue 585 27,016Costs and expenses 590 27,273Net income (28) (1,320)Loss per share:

Basic (3.46) (159.85)Diluted (3.46) (159.85)

*Translated using the closing exchange rate at the reporting date (US$1:P=46.20)

The financial information of Stream is based on US Generally Accepted Accounting Principles which is different insome aspects from PFRS. Stream’s long-lived assets, goodwill and intangible assets (included as part of noncurrentassets) have been reviewed for impairment in accordance with these standards.

The following significant transactions affected the Group’s investments in its associates and jointly controlled entities:

Investment in GlobeIn June 2008, the Company sold 3.8 million shares to Singapore Telecom, Inc. (SingTel) decreasing its ownershipinterest in Globe’s common shares from 33.3% to 30.5%. The Company’s gain arising from the sale of investments inGlobe shares amounted to P=2.7 billion (see Note 21). The Company also holds 60% of Asiacom Philippines, Inc.,which owns 158.5 million Globe preferred shares. The Company does not exercise control over Asiacom since it is ajoint venture with SingTel.

Investment in eTelecare and StreamOn September 19, 2008, NewBridge, a subsidiary of the Company through LIL, together with Providence EquityPartners (Providence), entered into a Definitive Agreement to acquire up to all of the outstanding shares of eTelecarecommon shares and American Depository Shares (ADS) for US$9.00 per share. New Bridge and Providence formeda 50-50 joint venture company, EGS Corp. to own 100% of EGS Acquisition Corp. (EGS Acquisition).

On December 12, 2008, EGS Acquisition acquired through a tender offer, 98.7% of the outstanding eTelecarecommon shares and ADS for a total consideration of US$285.3 million plus US$9.4 million in transactions costs. The22.2% eTelecare shares owned by Newbridge were tendered and included in the purchase.

40

2009 ANNUAL REPORT 113

On August 14, 2009, a Share Exchange Agreement (the Agreement) was entered into by Stream, EGS Corp., EGSDutchco B.V. (EGS Dutchco), and NewBridge to combine in a stock-for-stock exchange. Under the Agreement:

NewBridge shall contribute all its rights with respect to the US$35.8 million advances to EGS Corp.(see Note 29). These advances were originally borrowed by EGS Corp. from AYC Holdings. AYC Holdingsassigned the advances to NewBridge.NewBridge shall transfer to Stream all the shares of EGS Corp. that it owns including shares that would resultfrom the conversion of the US$35.8 million advances; and,Stream shall issue and deliver to NewBridge an aggregate of 20,192,068 common shares with $0.001 par valueper share provided that at the election of Stream, Stream may pay an aggregate of US$5,994 in cash for anaggregate of 1,131 shares (at $5.30 per share) of Stream Common Stock otherwise issuable to NewBridge.

On October 1, 2009 (the Closing Date), NewBridge received a total of 20,190,937 shares of Stream’s capital stockrepresenting 25.5% interest in Stream and cash amounting to $5,994 in lieu of 1,131 shares. As a result of thetransaction, NewBridge:

derecognized its Investment in and Loan Receivable from EGS Corp. amounting to US$61.5 million andUS$35.8 million, respectively;recognized an Investment in Stream amounting to US$107.0 million; and,recognized a gain from the transaction amounting to US$8.8 million.

After the Closing Date, Newbridge acquired additional 320,146 common shares Stream at a total cost ofUS$1.9 million.

As of December 31, 2009, Newbridge’s effective ownership in Stream is 25.76%.

Investment in MWCIIn various dates in 2009, the Company acquired 40.8 million common shares of MWCI for a total consideration ofP=572.4 million. This increased the Company’s ownership interest in MWCI from 29.9% to 31.5%.

Investment in NTDCCIn 2007, a series of capital calls were made by NTDCC amounting to P=484.8 million, increasing ALI’s overall investedcapital to P=1,450.0 million or a 49.29% stake.

NTDCC was assigned development rights over certain areas of the MRT Depot in Quezon City by MRT DevelopmentCo. to construct and operate a commercial center under certain terms and conditions until the end of a 50-yeardevelopment period renewable for another 25 years. NTDCC was primarily organized to own and operate thecommercial center atop the MRT Depot. NTDCC officially started the construction of the shopping center, now knownas TriNoma, in 2005 and became operational on May 16, 2007.

Investment in ECHI, BHI and BLCALI Group’s investment in BLC is accounted for using the equity method because the ALI Group has significantinfluence over BLC. ECHI and BHI are joint venture companies established by ALI to indirectly hold its equity interestin BLC.

On July 31, 2008, the ALI Group acquired additional 4,360,178 shares of BLC from Fort Bonifacio DevelopmentCorporation amounting to P=689.0 million, equivalent to 7.66% ownership in BLC. This resulted in an increase in ALIGroup’s effective interest in BLC from 37.23% to 41.10%.

In January and October 2009, ALI Group acquired additional 2,295,207 shares of BLC from the Development Bank ofthe Philippines and Metro Pacific Corporation (MPC) amounting to P=362.6 million. This resulted in an increase in theALI Group’s effective interest in BLC from 41.10% as of December 31, 2008 to 45.05% as of December 31, 2009.

Investment in PhilwaterThe Company does not exercise control over Philwater since it is a joint venture with United Utilities Pacific HoldingsBV.

41

114 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Investment in ARCH FundIn 2006, the Company and ALI entered into a Shareholders’ Agreement with ARCH Capital Management Co. Ltd.(ARCH Capital) and Great ARCH Co. Limited, wherein the Company and ALI committed to invest a total ofUS$75.0 million in a private equity fund that will explore property markets in Asia, excluding Japan and thePhilippines. In the same year, an Amendment and Adherence Agreement was entered into by the same parties,together with Fine State Group Limited (Fine State) and Green Horizons Holdings Limited (Green Horizons),transferring the interests of the Company and ALI in ARCH Capital into Fine State and Green Horizons, respectively.Fine State and Green Horizons are effectively 100% owned Hong Kong based subsidiaries of the Company and ALI,respectively.

The Company (through Fine State) and ALI (through Green Horizons) both have interests in the fund managementcompany, ARCH Capital, which is tasked to raise third party capital and pursue investments for the Fund. As ofDecember 31, 2009 and 2008, the Company (through Fine State) and ALI (through Green Horizon) owned acombined interest in ARCH Capital of 50%.

In 2007, the private equity fund, called ARCH Asian Partners, L.P. (Fund) was established. As of December 31,2007, the Fund achieved its final closing, resulting in a total investor commitment of US$330.0 million. As a result, aportion of the funds disbursed by the Company and ALI which were invested into the Fund has been returned in 2007,reducing the Company and ALI’s overall invested capital to P=580.3 million as of December 31, 2007. In 2008, theFund issued a capital call where the Company and ALI’s share amounted to US$3.9 million. In 2009, the Fund issuedanother capital call where the Company and ALI’s share amounted US$6.4 million.

As of December 31, 2009, the Company and ALI’s remaining capital commitment with the Fund amounted toUS$31.8 million.

The Company and ALI exercise significant influence over the Fund by virtue of their interest in the general partner andin ARCH Capital. Accordingly, the Company and ALI account for their investments in the Fund using the equitymethod of accounting.

Interest in Limited Partnerships of Ayala International North America (AINA)Other investments include AINA’s interest in various Limited Partnerships with a carrying value of P=1,164.4 millionand P=1,950.7 million as of December 31, 2009 and 2008, respectively. These investments are all incorporated in theUnited States of America (USA) and are mainly involved in developing properties in different states in the USA.Although the interest of AINA in certain limited partnerships exceeds 50%, these limited partnerships are accountedfor under the equity method of accounting because AINA does not have control over the financial and operatingpolicies of these partnerships.

In 2009, impairment loss amounting to P=574.0 million were provided for property development projects of certainlimited partnerships with projected negligible residual values after deducting amount of repayment on loans drawn forthe support and costs incurred for the projects and those that have been served with notices of default by banks. Theimpairment loss is netted against the equity in net income of associates and jointly controlled entities in theconsolidated statements of income.

The excess of cost of investments over the Group’s equity in the net assets of its associates and jointly controlledentities accounted for under the equity method amounted to P=12.2 billion and P=10.5 billion and as of December 31,2009 and 2008, respectively.

As of December 31, 2009 and 2008, the Group has no capital commitments with its jointly controlled entities.

11. Investments in Bonds and Other Securities

This account consists of investments in:

2009 2008(In Thousands)

AFS financial assetsQuoted equity investments P=877,509 P=1,449,982Unquoted equity investments 2,392,489 1,614,520

3,269,998 3,064,502Quoted debt investments 1,199,154 –

4,469,152 3,064,502Less current portion (Note 8) 925,694 –

P=3,543,458 P=3,064,502

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2009 ANNUAL REPORT 115

The unquoted equity investments include investments in TRG Global Opportunity Fund (GOF) and TRG SpecialOpportunity Fund (SOF). The GOF is a multi-strategy hedge fund which invests primarily in emerging marketssecurities. The SOF focuses on less liquid assets in emerging markets (Latin America, Asia, Emerging Europe,Middle East and Africa) such as distressed debt, NPLs, corporate high yield, mid and small cap stocks, real estate(debt and equity) and private equity. It also includes the Group’s investment in Red River Holding in 2008. The RedRiver Holding is a fund that seeks to achieve a balanced and diversified portfolio of Vietnamese companies. In 2009,capital calls amounting to US$4.6 million were made, bringing the total investment in Red River Holdings toUS$8.1 million as of December 31, 2009. As of December 31, 2009, the remaining capital commitment of the Grouprelating to its investment in Red River Holding amounted to US$2.0 million.

Unquoted equity investments also include unlisted preferred shares in a public utility company which the Group willcontinue to carry as part of the infrastructure that it provides for its real estate development projects. These arecarried at cost less impairment, if any.

As of December 31, 2009 and 2008, the Net Unrealized Gain (Loss) on AFS financial assets as reflected in the equitysection is broken down as follows:

2009 2008(In Thousands)

Net unrealized gain on AFS financial assets ofthe Company and its consolidated subsidiaries P=463,852 P=78,320

Share in the net unrealized loss on AFS financialassets of associates (339,936) (709,447)

P=123,916 (P=631,127)

The rollforward of unrealized gain (loss) on AFS financial assets of the Company and its consolidated subsidiaries isas follows:

2009 2008(In Thousands)

Balance at beginning of year P=78,320 P=834,589Changes in fair value recognized in equity 409,245 (1,862,720)Recognized in profit and loss (23,713) 1,106,451Balance at end of year P=463,852 P=78,320

12. Investment Properties

The movements in investment properties follow:

2009

Land Building Total(In Thousands)

CostBalance at beginning of the year P=5,772,835 P=21,406,904 P=27,179,739Additions 273,744 3,239,075 3,512,819Transfers – 5,944,985 5,944,985Retirements (247) (686,555) (686,802)Balance at end of the year 6,046,332 29,904,409 35,950,741Accumulated Depreciation and AmortizationBalance at beginning of the year 152,589 5,682,170 5,834,759Depreciation and amortization (Note 21) – 982,125 982,125Reversals of impairment loss (125,973) – (125,973)Transfers – 191,426 191,426Retirements – (21,326) (21,326)Balance at end of the year 26,616 6,834,395 6,861,011Net Book Value P=6,019,716 P=23,070,014 P=29,089,730

43

116 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

2008

Land Building Total(In Thousands)

CostBalance at beginning of the year P=5,798,283 P=16,898,156 P=22,696,439Additions 3,932 769,684 773,616Additions through business

combination (Note 22) – 4,017,955 4,017,955Retirements (29,380) (278,891) (308,271)Balance at end of the year 5,772,835 21,406,904 27,179,739Accumulated Depreciation and AmortizationBalance at beginning of the year 152,589 5,127,677 5,280,266Depreciation and amortization (Note 21) – 730,845 730,845Additions through business

combination (Note 22) – 73,828 73,828Retirements – (250,180) (250,180)Balance at end of the year 152,589 5,682,170 5,834,759Net Book Value P=5,620,246 P=15,724,734 P=21,344,980

Certain parcels of land are leased to several individuals and corporations. Some of the lease contracts provide,among others, that within a certain period from the expiration of the contracts, the lessee will have to demolish andremove all improvements (such as buildings) introduced or built within the leased properties. Otherwise, the lessorwill cause the demolition and removal thereof and charge the cost to the lessee unless the lessor occupies andappropriates the same for its own use and benefit.

The aggregate fair value of the Group’s investment properties amounted to P=168.9 billion in 2009 and P=131.91 billionin 2008. The fair values of the investment properties were determined based on valuations performed by independentprofessional qualified appraisers.

Consolidated rental income from investment properties amounted to P=7.4 billion in 2009, P=5.9 billion in 2008 andP=5.5 billion in 2007. Consolidated direct operating expenses arising from the investment properties amounted toP=2.5 billion in 2009, P=3.1 billion in 2008 and P=2.4 billion in 2007.

13. Property, Plant and Equipment

The movements in property, plant and equipment follow:

2009Land,

Buildings andImprovements

(Note 18)

Machineryand

Equipment(Note 28)

HotelProperty and

Equipment(Note 18)

Furniture,Fixtures and

EquipmentTransportation

EquipmentConstruction-

in-Progress Total(In Thousands)

CostAt January 1 P=3,817,895 P=7,641,215 P=2,927,132 P=1,999,690 P=1,409,698 P=5,965,846 P=23,761,476Additions 715,796 473,065 90,058 587,372 545,770 76,709 2,488,770Additions through business

combination (Note 22) 65,576 136,376 – – – – 201,952Disposals (31,375) (688,579) (94,750) (41,855) (431,027) (2,588) (1,290,174)Transfers 140,500 – – – – (5,963,123) (5,822,623)Exchange differences (69,903) (106,771) – (26,953) (1,769) 15,872 (189,524)At December 31 4,638,489 7,455,306 2,922,440 2,518,254 1,522,672 92,716 19,149,877Accumulated depreciation

and amortization andimpairment loss

At January 1 1,980,551 4,065,995 1,499,952 1,594,811 735,350 – 9,876,659Depreciation and amortization

for the year (Note 21) 347,132 1,205,873 125,105 306,969 142,894 – 2,127,973Disposals (1,622) (333,996) (86,792) (33,975) (147,907) – (604,292)Transfers 101,567 – – – – – 101,567Exchange differences (44,189) (57,188) – (21,538) (978) – (123,893)At December 31 2,383,439 4,880,684 1,538,265 1,846,267 729,359 – 11,378,014Net book value P=2,255,050 P=2,574,622 P=1,384,175 P=671,987 P=793,313 P=92,716 P=7,771,863

44

2009 ANNUAL REPORT 117

2008Land,

Buildings andImprovements

(Note 18)

Machineryand

Equipment(Note 28)

HotelProperty and

Equipment(Note 18)

Furniture,Fixtures and

EquipmentTransportation

EquipmentConstruction-

in-Progress Total(In Thousands)

CostAt January 1 P=3,407,607 P=6,675,439 P=2,693,069 P=1,985,808 P=1,040,022 P=1,354,449 P=17,156,394Additions 376,720 1,269,742 236,064 276,505 477,798 3,328,603 5,965,432Additions through business

combination (Note 22) 227 70,046 – 23,698 1,640 1,287,009 1,382,620Disposals (317,916) (235,628) (2,001) (59,994) (118,428) (4,215) (738,182)Transfers 29,829 (705,809) – (300,200) – – (976,180)Exchange differences 321,428 567,425 – 73,873 8,666 – 971,392At December 31 3,817,895 7,641,215 2,927,132 1,999,690 1,409,698 5,965,846 23,761,476Accumulated depreciation

and amortization andimpairment loss

At January 1 P=1,760,130 P=3,372,359 P=1,399,430 P=1,515,742 P=615,888 P=– P=8,663,549Depreciation and amortization

for the year (Note 21) 325,341 938,985 102,523 260,529 205,204 – 1,832,582Impairment loss for the year

(Note 21) 36,003 – – 37,400 – – 73,403Additions through business

combination (Note 22) 26 65,557 – 8,632 1,439 – 75,654Disposals (283,376) (187,297) (2,001) (44,063) (90,688) – (607,425)Transfers – (395,901) – (206,512) – – (602,413)Exchange differences 142,427 272,292 – 23,083 3,507 – 441,309At December 31 1,980,551 4,065,995 1,499,952 1,594,811 735,350 – 9,876,659Net book value P=1,837,344 P=3,575,220 P=1,427,180 P=404,879 P=674,348 P=5,965,846 P=13,884,817

Consolidated depreciation and amortization expense on property, plant and equipment amounted to P=2,128.0 millionin 2009, P=1,832.6 million in 2008 and P=1,819.2 million in 2007 (see Note 21).

In 2008, IMI recognized an impairment loss amounting to P=73.4 million representing the carrying amount of theproduction assets dedicated to EPSON Imaging Devices, Panasonic Communication of the Philippines and PanacCo. Ltd., net of reimbursements received, following the pre-termination of the existing manufacturing agreements withsaid companies (see Note 21).

Part of the property, plant and equipment derecognized by IMI pertains to facilities damaged by fire with book valueamounting to US$0.1 million (P=4.6 million). The loss from the damaged facilities is included under “General andadministrative” in the consolidated statement of income.

Starting January 2009, IMI extended the estimated useful life of Surface Mount Technology and other productionequipment from five to seven years due to factors which demonstrated that the equipment can be used for more thanfive years. The change in estimated useful life reduced depreciation expense for the year by US$2.07 million(P=95.6 million).

14. Intangible Assets

The movements in intangible assets follow:

2009

GoodwillCustomer

RelationshipsOrder

BacklogUnpatentedTechnology

DevelopedSoftware Licenses Total

(In Thousands)CostAt January 1 P=3,982,256 P=1,226,469 P=4,128 P=4,752 P=20,312 P=161,582 P=5,399,499Additions through business

combination (Note 22) 550,506 280,430 – – 14,505 – 845,441Additions during the year 221,931 – – – – 19,722 241,653Exchange differences (86,999) (44,856) (132) (645) (959) (133,591)At December 31 4,667,694 1,462,043 4,128 4,620 34,172 180,345 6,353,002Accumulated amortization

and impairment lossAt January 1 662,591 795,908 4,128 2,727 20,312 48,436 1,534,102Amortization (Note 21) – 191,711 – 957 7,938 35,281 235,887Exchange differences (28,305) (114) (238) (214) (28,871)At December 31 662,591 959,314 4,128 3,570 28,012 83,503 1,741,118Net book value P=4,005,103 P=502,729 P=– P=1,050 P=6,160 P=96,842 P=4,611,884

45

118 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

2008

GoodwillCustomer

RelationshipsOrder

BacklogUnpatentedTechnology

DevelopedSoftware Licenses Total

(In Thousands)CostAt January 1 P=3,264,238 P=936,354 P=4,128 P=4,128 P=20,312 P=140,946 P=4,370,106Additions through business

combination (Note 22) 343,743 153,680 – – – – 497,423Exchange differences 374,275 136,435 – 624 – 20,636 531,970At December 31 3,982,256 1,226,469 4,128 4,752 20,312 161,582 5,399,499Accumulated amortization

and impairment lossAt January 1 662,591 414,487 4,128 1,652 11,551 – 1,094,409Amortization (Note 21) – 318,766 – 826 8,761 48,436 376,789Exchange differences – 62,655 – 249 – – 62,904At December 31 662,591 795,908 4,128 2,727 20,312 48,436 1,534,102Net book value P=3,319,665 P=430,561 P=– P=2,025 P=– P=113,146 P=3,865,397

Goodwill mainly comprises the excess of the acquisition cost over the fair value of the identifiable assets and liabilitiesof companies acquired by IMI and Integreon, Inc (Integreon).

Impairment testing of goodwill for IMIGoodwill acquired through business combinations have been allocated to three individual CGUs of IMI for impairmenttesting as follows:

2009 2008In US$ In Php* In US$ In Php**

(In Thousands)Speedy Tech Electronics, Ltd. US$45,128 P=2,084,916 US$45,128 P=2,144,483Saturn 657 30,353 657 31,221M. Hansson Consulting, Inc. 441 20,374 441 20,956

US$46,226 P=2,135,643 US$46,226 P=2,196,660*Translated using the closing exchange rate at the statements of financial position date (US$1:P=46.20)**Translated using the closing exchange rate at the statements of financial position date (US$1:P=47.52)

The recoverable amounts of the CGUs have been determined based on value-in-use calculations using cash flowprojections from financial budgets approved by management covering a five-year period. The pre-tax discount rateapplied to cash flow projections is 12% and 10% in 2009 and 2008, respectively, and cash flows beyond the five-yearperiod are extrapolated using a steady growth rate of 1% which does not exceed the compounded annual growth ratefor the global EMS industry.

Key assumptions used in value-in-use calculationsThe calculations of value-in-use for the CGUs are most sensitive to assumptions on budgeted gross margins, growthrates and pre-tax discount rates.

Gross margins are based on the mix of business model arrangements with the customers whether consigned orturnkey. The forecasted growth rate is based on a steady growth rate which does not exceed the compoundedannual growth rate for the global EMS industry. Discount rates reflect management’s estimate of the risks specific toeach CGU. This is the benchmark used by management to assess operating performance.

Based on the value-in-use calculations, the carrying values of the CGUs did not exceed their recoverable amounts.Therefore, IMI did not recognize any impairment loss in 2009 and 2008.

With regard to the assessment of value-in-use of the three CGUs, IMI management believes that a reasonablypossible change in any of the above key assumptions will not cause the carrying value of the CGU to materiallyexceed its recoverable amount.

46

2009 ANNUAL REPORT 119

Impairment testing of goodwill for IntegreonThe Goodwill of Integreon arose from the acquisition of the following companies:

2009 2008In US$ In Php* In US$ In Php**

(In Thousands)Grail US$11,557 P=533,933 US$– P=–CBF Group, Inc. 10,153 469,069 10,153 482,471Integreon Managed Solutions, Inc. 8,770 405,174 8,770 416,750Datum Legal, Inc. 5,374 248,279 3,678 174,779Contentscape 370 17,094 370 17,582

US$36,224 P=1,673,549 US$22,971 P=1,091,582*Translated using the closing exchange rate at the reporting date (US$1:P=46.20)**Translated using the closing exchange rate at the reporting date (US$1:P=47.52)

Goodwill has been allocated to the Integreon CGU for purposes of impairment testing.

In 2009, the recoverable amount of the CGU has been determined based on fair value less cost to sell. The fair valueless cost to sell calculation considered the enterprise value of the CGU based on a recent tender offer to which thegoodwill is allocated.

In 2008, the recoverable amount of the CGU has been determined based on value-in-use calculation using cash flowprojections from financial budgets approved by management covering a five-year period. The pre-tax discount rateapplied to cash flow projections is 22% and cash flows beyond the five-year period are extrapolated using a steadygrowth rate of 5%.

Key assumptions used in value-in-use calculationThe calculations of value-in-use for the CGU are most sensitive to the following assumptions: revenue growth for thefive-year projection period, growth rate beyond the five-year period and the pre-tax discount rate. The assumptionsare based on management’s estimate after considering industry outlook.

Based on the value-in-use calculation, the carrying value of the CGU did not exceed its recoverable amount.Therefore, Integreon did not recognize any impairment loss in 2008.

With regard to the assessment of value-in-use of the CGU, Integreon management believes that a reasonablypossible change in any of the above key assumptions will not cause the carrying value of the CGU to materiallyexceed its recoverable amount.

15. Noncurrent Assets Held for Sale

In 2006, the Group had negotiations to sell its equity interests in Makati Property Ventures, Inc. (MVPI) and HermillInvestments Pte. Ltd. (Hermill).

In 2007, the Group recognized a gain amounting to P=598.8 million as a result of the consummation of the sale ofMPVI and P=26.0 million as a result of the Hermill sale (included in “Income associated with noncurrent assets held forsale” in the consolidated statement of income).

EPS on income associated with noncurrent assets held for sale attributable to equity holders of the Company follows(amounts in thousands, except for EPS figures):

2007Income associated with noncurrent assets held for sale P=624,788Less: Income associated with noncurrent assets held for sale attributable to

noncontrolling interests 139,982484,806

Weighted average number of common shares for basic EPS 496,787Dilutive shares arising from stock options 2,374Adjusted weighted average number of common shares for diluted EPS 499,161Basic EPS P=0.98Diluted EPS P=0.97

47

120 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

16. Accounts Payable and Accrued Expenses

This account consists of the following:

2009 2008(In Thousands)

Accounts payable P=14,584,321 P=13,922,547Accrued expenses 6,152,842 6,821,712Dividends payable 2,264,306 1,333,740Accrued project costs 2,136,700 2,022,903Taxes payable 1,470,295 1,659,597Accrued personnel costs 427,502 823,717Interest payable 402,278 501,251Retentions payable 120,938 262,330Related parties (Note 29) 105,355 135,739

P=27,664,537 P=27,483,536

Accounts payable and accrued expenses are noninterest-bearing and are normally settled on 15- to 60-day terms.Other payables are noninterest-bearing and are normally settled within one year.

Accrued expenses consist mainly of accruals for light and power, marketing costs, film share, professional fees,postal and communication, supplies, repairs and maintenance, transportation and travel, security, insurance, andrepresentation.

17. Other Current Liabilities

This account consists of:

2009 2008(In Thousands)

Customers’ deposits P=2,374,457 P=1,246,593Other liabilities 447,475 306,937

P=2,821,932 P=1,553,530

18. Short-term and Long-term Debt

Short-term debt consists of:

2009 2008(In Thousands)

Philippine peso debt - with interest rates ranging from5.0% to 9.5% per annum in 2009 and 7.0% to 9.6%per annum in 2008 P=1,669,875 P=1,501,000

Foreign currency debt - with interest rates ranging from1.9% to 3.9% per annum in 2009 and 2.5% to 6.4%per annum in 2008 968,783 1,254,447

P=2,638,658 P=2,755,447

The Philippine peso debt consists mainly of ALI’s and its subsidiaries’ bank loans of P=1,423.0 million andP=1,279.5 million as of December 31, 2009 and 2008, respectively. These are unsecured peso-denominatedshort-term borrowings with interest rates of 5.0%per annum in 2009 and 7.0% to 8.5% per annum in 2008.

The foreign currency debt consists mainly of BHL’s and IMI’s loans from various banks.

48

2009 ANNUAL REPORT 121

Long-term debt consists of:

2009 2008(In Thousands)

The Company:Bank loans - with interest rates ranging from 4.7% to

4.8% per annum in 2009 and 6.3% to 6.6% perannum in 2008 and varying maturity dates up to2013 P=6,985,000 P=6,990,000

Fixed Rate Corporate Notes (FXCNs) with interestrates ranging from 6.7% to 8.4% per annum andvarying maturity dates up to 2016 11,485,000 10,662,500

Bonds due 2012 6,000,000 6,000,000Syndicated term loan 1,498,333 1,584,907

25,968,333 25,237,407Subsidiaries:

Loans from banks and other institutions:Foreign currency - with interest rates ranging from

3.3% to 15.0% per annum in 2009 and 2.7% to15.0% per annum in 2008 10,724,816 10,985,557

Philippine peso - with interest rates ranging from7.0% to 9.7% per annum in 2009 and 9.5% to20.0% per annum in 2008 7,759,743 7,819,128

Bonds:Due 2009 – 106,930Due 2012 41,835 –Due 2013 4,000,000 4,000,000Due 2016 10,000 –

FXCNs 5,380,000 3,580,00027,916,394 26,491,61553,884,727 51,729,022

Less current portion 2,453,144 1,478,871P=51,431,583 P=50,250,151

The CompanyGenerally, the Company’s long-term loans are unsecured. Due to certain regulatory constraints in the local bankingsystem regarding loans to directors, officers, stockholders and related interest, some of the Company’s credit facilitieswith a local bank are secured by shares of stock of a consolidated subsidiary with fair value of P=6,712.9 million as ofDecember 31, 2009 and P=2,844.0 million as of December 31, 2008 in accordance with BSP regulations.

All credit facilities of the Company outside of this local bank are unsecured, and their respective credit agreementsprovide for this exception. The Company positions its deals across various currencies, maturities and product typesto provide utmost flexibility in its financing transactions.

In 2007, the Company issued P=3.5 billion FXCNs consisting of 5- and 7-year notes to a local bank with fixed interestrates of 6.73% and 6.70% per annum, respectively.

In 2005, the Company issued P=7.2 billion FXCNs consisting of 5- and 7-year notes to various institutions with fixedinterest rates of 10.00% and 10.38% per annum, respectively.

In 2007, the Company issued 6.83% Fixed Rate Bonds with an aggregate principal amount of P=6.0 billion to mature in2012. Prior to maturity, the Company may redeem in whole the outstanding bonds on the twelfth and sixteenthcoupon payment date. The bonds have been rated “PRS Aaa” by the Philippine Ratings Services Corporation(PhilRatings).

In the first quarter of 2008, the Company availed of a syndicated term loan amounting to P=1.5 billion which bears fixedinterest rate of 6.75% per annum and will mature in 2018.

In February 2009, the Company issued P=4.0 billion FXCNs consisting of two 5-year notes and a 6-year note tovarious financial institutions with fixed interest rates of 7.75% and 7.95% per annum for the 5-year notes and 8.15%per annum for the 6-year note.

In March 2009, the Company issued P=1.0 billion FXCNs consisting of 7-year note to a local financial institution withfixed interest rate of 8.40% per annum.

49

122 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

In August 2009, the Company issued P=3.0 billion FXCNs consisting of a 5-year note to various institutions with fixedinterest rate of 7.45% per annum.

SubsidiariesForeign Currency DebtIn 2008, the Company, through a wholly owned subsidiary, entered into a 5-year syndicated term loan with a foreignbank, with the Company as guarantor, for US$50.0 million at a rate of 52 points over the 1-, 3- or 6- month LIBOR atthe Company’s option.

In 2007, the Company, through a wholly owned subsidiary, entered into a 5-year syndicated loan for US$150.0 millionat a rate of 71.4 basis points over the 1-month, 3-month or 6-month LIBOR at the Company’s option.

In 2006, IMI obtained a US$40.0 million 5-year term clean loan from a local bank payable in a single balloon paymentat the end of the loan term. IMI may, at its option, prepay the loan in part or in full, together with the accrued interestwithout penalty. The interest is repriced quarterly at the rate of 3-months LIBOR plus margin of 0.80% and is payablequarterly. In 2007, IMI prepaid a portion of the loan amounting to US$10.0 million.

In 2006, IMI Singapore, a wholly owned subsidiary of IMI, obtained a US$40.0 million variable rate 5-year loan,repayable in 10 equal semi-annual installments of US$4.0 million commencing on May 29, 2007 and maturing onNovember 29, 2011. The interest is repriced semi-annually at the LIBOR rate plus 0.75% quoted by the bank and ispayable semi-annually. As of December 31, 2009 and 2008, the outstanding balance of the loan amounted toUS$16.0 million and US$24.0 million, respectively.

Philippine Peso DebtThe Philippine Peso loans pertain to ALI subsidiaries’ loans that will mature on various dates up to 2015 with floatinginterest rates at 100 basis points to 200 basis points spread over benchmark 91-day PDST-R1/R2 and fixed interestrates of 6.97% to 9.72% per annum. The term loan facility of a subsidiary is secured by a Mortgage Trust Indentureover land and building with a total carrying value of P=811.2 million and P=612.4 million as of December 31, 2009 and2008, respectively.

Home Starter Bonds due 2009ALI launched in March 2006 its Homestarter Bonds of up to P=169.2 million with fixed interest rate of 5% per annum.The Homestarter Bonds are being issued monthly in a series for a period of thirty six (36) months with final maturity inMarch 2009. On maturity date, the principal amount of the bond is redeemable with the accrued interest. Should thebondholder decide to purchase an Ayala Land property, he is entitled to an additional 10% of the aggregate facevalue of the bond as bonus credit which together with the principal and accrued interest can be applied asdownpayment towards the purchase of an Ayala Land Premier, Alveo or Avida property. As of December 31, 2008,the outstanding Homestarter Bonds amounted to P=106.9 million. Bonds that were not applied as downpayment forproperty and remained outstanding were fully redeemed on March 16, 2009, the final maturity date.

Homestarter Bond due 2012ALI launched a new issue of the Homestarter Bond in October 2009. The bond is to be issued over a series of 36issues, once every month which commenced on October 16, 2009, up to P=14.0 million per series or up to anaggregate issue amount of P=504.0 million over a 3-year period. The bond carries an interest rate of 5% per annum,payable on the final maturity date or upon the bondholder’s exercise of the option to apply the bond to partial or fullpayment for a residential property offered for sale by ALI or its affiliates. In the event of application of the bond topartial or full payment for property, the bondholder shall be entitled to, in addition to interest, a notional creditequivalent to 10% of the aggregate face value of the bond (the “bonus credit”). The bonus credit is subject to amaximum of 5% of the net selling price of the property selected. The bond is alternatively redeemable at par plusaccrued interest on the third anniversary of the initial issue date.

5-Year Bonds due 2013In 2008, ALI issued P=4.0 billion bonds due 2013 with fixed rate equivalent to 8.75% per annum. The PhilRatingsassigned a PRS Aaa rating on the bonds indicating that it has the smallest degree of investment risk. Interestpayments are protected by a large or by an exceptionally stable margin and principal is assured. While the variousprotective elements are likely to change, such changes as can be visualized are most unlikely to impair thefundamentally strong position of such issues. PRS Aaa is the highest credit rating possible on PhilRatings’ ratingscales for long-term issuances.

5-,7- and 10-year FXCNs due in 2011, 2013 and 2016In 2006, ALI issued P=3.0 billion FXCNs consisting of 5-, 7- and 10-year notes issued to various financial institutionsand will mature on various dates up to 2016. The FXCNs bear fixed interest rates ranging from 7.3% to 7.8% perannum depending on the term of the notes.

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2009 ANNUAL REPORT 123

10-year FXCNs due 2012ALI also has outstanding P=580.0 million 10-year FXCNs with fixed interest rate of 14.9% per annum issued in 2002and due 2012. In February 2009, ALI prepaid in full such FXCNs.

5-, 7- and 10-year FXCN due 2014, 2016 and 2019In 2009, ALI issued an aggregate P=2.38 billion in 5-, 7- and 10-year notes to various financial institutions and retailinvestors. The notes will mature on various dates up to 2019. The FXCNs bear fixed interest rates ranging from7.76% to 8.90%.

7-year FXCN due 2016In 2009, ALI executed a P=1.0 billion committed FXCN facility with a local bank, of which an initial P=10 million wasdrawn on October 12, 2009. The FXCN bears a floating interest rate based on the 3-month PDST-R1 plus a spreadof 0.96%, repriceable quarterly. The initial note drawn, together with any future drawings, will mature on the seventhanniversary of the initial drawdown date.

The loan agreements on long-term debt of the Company and certain subsidiaries provide for certain restrictions andrequirements with respect to, among others, payment of dividends, incurrence of additional liabilities, investments andguaranties, mergers or consolidations or other material changes in their ownership, corporate set-up or management,acquisition of treasury stock, disposition and mortgage of assets and maintenance of financial ratios at certain levels.These restrictions and requirements were complied with by the Group as of December 31, 2009 and 2008.

Total interest paid amounted to P=3.9 billion in 2009, P=3.7 billion in 2008 and P=3.8 billion in 2007.

Interest capitalized by subsidiaries amounted to P=76.3 million in 2009 and P=151.0 million in 2008. The averagecapitalization rate is 7.15% and 6.27% in 2009 and 2008, respectively.

19. Other Noncurrent Liabilities

This account consists of the following:

2009 2008(In Thousands)

Deposits and deferred credits P=5,479,797 P=4,880,443Retentions payable 1,967,042 1,766,831Other liabilities 1,662,341 940,806

P=9,109,180 P=7,588,080

Deposits are initially recorded at fair value, which was obtained by discounting future cash flows using the applicablerates of similar types of instruments. The difference between the cash received and its fair value is recorded asdeferred credits.

Other liabilities mainly include amounts due to related parties, nontrade payables, subscription payable and others(see Note 29).

20. Equity

The details of the Company’s common and equity preferred shares follow:

Common shares Preferred A shares Preferred B shares2009 2008 2007 2009 2008 2009 2008 2007

(In Thousands, except par value figures)Authorized shares 600,000 600,000 600,000 12,000 12,000 58,000 58,000 58,000Par value per share P=50 P=50 P=50 P=100 P=100 P=100 P=100 P=100Issued and subscribed

shares 500,176 498,362 414,687 12,000 12,000 58,000 58,000 58,000Treasury shares 1,844 1,378 324 – – – – –

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124 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Preferred sharesIn February 2006, the BOD approved the reclassification of the unissued preferred shares and redeemed preferredshares of the Company into 58 million new class of Preferred B shares with a par value of P=100 per share or anaggregate par value of P=5,800 million. The Preferred B shares have the following features: (a) optional redemption bythe Company; (b) issue value, dividend rate and declaration thereof to be determined by the BOD; (c) cumulative inpayment of current dividends as well as any unpaid back dividends and non-participating in any other furtherdividends; (d) nonconvertible into common shares; (e) preference over holders of common stock in the distribution ofcorporate assets in the event of dissolution and liquidation of the Company and in the payment of the dividend at therate specified at the time of issuance; (f) nonvoting except in those cases specifically provided by law; (g) no pre-emptive rights to any issue of shares, common or preferred; and; (h) reissuable when fully redeemed.

In July 2006, the Company filed a primary offer in the Philippines of its Preferred B shares at an offer price of P=100per share to be listed and traded on the Philippine Stock Exchange (PSE). The Preferred B shares are cumulative,nonvoting and redeemable at the option of the Company under such terms that the BOD may approve at the time ofthe issuance of shares and with a dividend rate of 9.4578% per annum. The Preferred B shares may be redeemed atthe option of the Company starting in the fifth year.

On January 31, 2008, the BOD approved the re-issuance and reclassification of 1.2 billion redeemed Preferred A andAA shares with a par value of P=1.00 per share into 12.0 million new Preferred A shares with a par value of P=100 pershare with the same features as the existing Preferred B shares, except on the issue price and dividend rate and theamendment of the Company’s amended Articles of Incorporation to reflect the reclassification of the redeemedPreferred shares into new Preferred A shares. On April 4, 2008, the Company’s stockholders ratified the reissuanceand reclassification.

On July 9, 2008, the SEC approved the amendments to the Company’s Articles of Incorporation embodying thereclassification of the redeemed Preferred shares.

In November 2008, the Company filed a primary offer in the Philippines of its Preferred A shares at an offer price ofP=500 per share to be listed and traded on the PSE. The Preferred A shares are cumulative, nonvoting andredeemable at the option of the Company under such terms that the BOD may approve at the time of the issuance ofshares and with a dividend rate of 8.88% per annum. The Preferred A shares may be redeemed at the option of theCompany starting in the fifth year.

Common sharesOn December 7, 2006, the BOD approved the increase of the authorized common stock from P=19.0 billion dividedinto 380,000,000 shares to P=30.0 billion divided into 600,000,000 shares with a par value of P=50 per share. The BODlikewise approved the declaration of a 20% stock dividend to all common stockholders to be issued from theincreased authorized capital stock.

On April 30, 2007, the Company’s application for increase in authorized common stock and stock dividends wereapproved by the SEC.

The common shares may be owned or subscribed by or transferred to any person, partnership, association orcorporation regardless of nationality, provided that at anytime at least 60% of the outstanding capital stock shall beowned by citizens of the Philippines or by partnerships, associations or corporations 60% of the voting stock or votingpower of which is owned and controlled by citizens of the Philippines.

The details of the Company’s paid-up capital follow:

2009

PreferredStock - A

PreferredStock - B

CommonStock Subscribed

AdditionalPaid-inCapital

SubscriptionsReceivable

TotalPaid-upCapital

(In Thousands)As of January 1, 2009 P=1,200,000 P=5,800,000 P=24,772,493 P=145,598 P=5,734,748 (P=401,125) P=37,251,714Exercise of ESOP/ESOWN – – 1,047 89,653 346,007 (210,546) 226,161As of December 31, 2009 P=1,200,000 P=5,800,000 P=24,773,540 P=235,251 P=6,080,755 (P=611,671) P=37,477,875

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2009 ANNUAL REPORT 125

2008

PreferredStock - A

PreferredStock - B

CommonStock Subscribed

AdditionalPaid-inCapital

SubscriptionsReceivable

TotalPaid-upCapital

(In Thousands)As of January 1, 2008 P=– P=5,800,000 P=20,633,667 P=100,685 P=657,422 (P=336,380) P=26,855,394Exercise of ESOP/ESOWN – – – 44,913 319,151 (64,745) 299,319Issuance of shares 1,200,000 – 110 – 4,758,175 – 5,958,285Stock dividends – – 4,138,716 – – – 4,138,716As of December 31, 2008 P=1,200,000 P=5,800,000 P=24,772,493 P=145,598 P=5,734,748 (P=401,125) P=37,251,714

2007

PreferredStock - B

CommonStock Subscribed

AdditionalPaid-inCapital

SubscriptionsReceivable

TotalPaid-upCapital

(In Thousands)As of January 1, 2007 P=5,800,000 P=17,166,964 P=75,754 P=335,343 (P=240,113) P=23,137,948Exercise of ESOP/ESOWN – 17,119 24,931 322,079 (96,267) 267,862Stock dividends – 3,449,584 – – – 3,449,584As of December 31, 2007 P=5,800,000 P=20,633,667 P=100,685 P=657,422 (P=336,380) P=26,855,394

The movements in the Company’s outstanding number of common shares follow:

2009 2008 2007(In Thousands)

At January 1 496,984 414,363 344,850Stock dividends – 82,774 68,991Exercise of options ESOP/ESOWN 1,814 898 841Issuance of shares – 3 –Treasury stock (466) (1,054) (319)At December 31 498,332 496,984 414,363

On September 10, 2007, the BOD approved the creation of a share buyback program involving P=2.5 billion worth ofcommon capital stock. In 2009 and 2008, the Company acquired 466,360 and 1,054,422 common shares,respectively, at a total cost of P=138.2 million and P=390.8 million, respectively. As of December 31, 2009 and 2008,treasury stock amounted to P=688.7 million and P=550.5 million, respectively.

In addition, P=100.0 million Preferred A shares of the Company have been acquired by ALI. This has been accountedfor as “Parent Company Preferred shares held by a subsidiary” and presented as a reduction in equity.

Retained EarningsRetained earnings include the accumulated equity in undistributed net earnings of consolidated subsidiaries,associates and jointly controlled entities accounted for under the equity method amounting to P=33,990.7 million,P=30,308.0 million and P=29,824.0 million as of December 31, 2009, 2008 and 2007, respectively.

Retained earnings are further restricted for the payment of dividends to the extent of the cost of the common sharesheld in treasury.

In accordance with SEC Memorandum Circular No. 11 issued in December 2008, the Company’s retained earningsavailable for dividend declaration as of December 31, 2009 and 2008 amounted to P=31,060.0 million andP=30,745.9 million, respectively.

Dividends consist of the following:

2009 2008 2007(In Thousands, except dividends per share)

Dividends to common sharesCash dividends declared during the year P=1,994,148 P=1,989,484 P=3,312,426Cash dividends per share P=4.00 P=4.00 P=8.00Stock dividends P=– P=4,138,716 P=3,449,584

Dividends to equity preferred shares declaredduring the year P=2,025,567 P=548,552 P=548,552

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126 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

On December 10, 2009, the BOD approved the declaration and payment of cash dividends out of the unappropriatedretained earnings of the Company amounting to P=498.3 million or P=2 per share, payable to all common sharesshareholders of record as of January 8, 2010. The said dividends are payable on February 2, 2010. Also on thesame date, the BOD approved the declaration and payment of the quarterly dividends to all shareholders of theCompany’s Preferred A and Preferred B shares for calendar year 2010.

On January 31, 2008, the BOD approved the declaration of a 20% stock dividend to all common share holders of theCompany as of April 24, 2008. On April 4, 2008, the Company’s stockholders ratified the declaration of the 20% stockdividends to all stockholders.

Capital ManagementThe primary objective of the Company’s capital management policy is to ensure that it maintains a strong credit ratingand healthy capital ratios in order to support its business and maximize shareholder value.

The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions.To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders or issuenew shares. No changes were made in the objectives, policies or processes for the years ended December 31, 2009and 2008.

The Company is not subject to externally imposed capital requirements.

The Company monitors capital using a gearing ratio of debt to equity and net debt to equity. Debt consists of short-term and long-term debt. Net debt includes short-term and long-term debt less cash and cash equivalents and short-term investments. The Company considers as capital the equity attributable to equity holders of the Company.

2009 2008(In Thousands)

Short-term debt P=2,638,658 P=2,755,447Long-term debt 53,884,727 51,729,022Total debt 56,523,385 54,484,469Less:

Cash and cash equivalents 45,656,889 42,885,792Short-term investments 4,560,976 1,008,924

Net debt P=6,305,520 P=10,589,753Equity attributable to equity holders of the

Company P=102,260,427 P=97,311,192Debt to equity 55% 56%Net debt to equity 6% 11%

21. Other Income and Costs and Expenses

Other income consists of:

2009 2008 2007(In Thousands)

Gain on sale of investments P=1,698,820 P=3,554,679 P=8,844,822Management and marketing fees 680,244 626,350 485,802Insurance claim (Note 6) 280,100 – –Bargain purchase gain (Note 22) 235,851 – –Dividend income 204,691 148,914 73,500Gain on sale of other assets 168,063 45,409 54,064Rental income 66,795 40,442 39,351Marked-to-market gain (Note 8) 22,324 119,229 320,610Foreign exchange gain (loss) (64,974) 181,858 626,766Others 516,603 699,869 283,460

P=3,808,517 P=5,416,750 P=10,728,375

Gain on sale of investments consists mostly of gain arising from the sale of the Company’s investments in a listedsubsidiary, an associate and jointly controlled entities. Marked-to-market gain pertains to fair value gains on financialassets at FVPL and freestanding derivatives.

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2009 ANNUAL REPORT 127

In March 2008, ALI sold its shares of stock in Streamwood Property, Inc., Piedmont Property Ventures, Inc. andStonehaven Land, Inc. Total consideration received from the sale amounted to P=902.0 million. Gain on saleamounted to P=762.0 million included under “Gain on sale of investments”.

In December 2007, ALI entered into a joint venture with Kingdom Hotel Investments, Inc. to develop a 7,377-squaremeter property along Makati Avenue corner Arnaiz Avenue (formerly Pasay Road) into a luxury hotel complexcomprising a 300-room Fairmont Hotel, a 30-suite Raffles Hotel and 189 Raffles branded private residences. Thetotal project cost is approximately US$153.0 million.

The 7,377-square meter property to be developed was conveyed by ALI to KHI-ALI Manila, Inc. (KAMI) in exchangefor 37,250 common shares, 38,250 redeemable preferred shares A and 16,758 preferred shares of KAMI. OnDecember 13, 2007, ALI sold 16,758 of its preferred shares in KAMI to Kingdom Manila B.V., which resulted in a gainof P=1,004.0 million, reported under “Gain on sale of investments”.

Other income includes income derived from ancillary services of consolidated subsidiaries.

Cost of sales and services included in the consolidated statement of income are as follows:

2009 2008 2007(In Thousands)

Inventory P=34,281,857 P=34,440,421 P=30,196,530Personnel costs (Notes 25, 26 and 29) 5,279,394 6,782,659 5,215,984Depreciation and amortization 2,474,988 1,821,069 1,971,932Rental and utilities 2,339,382 2,725,843 2,127,910Professional and management fees 1,037,461 961,649 826,035Taxes and licenses 770,138 588,714 569,666Repairs and maintenance 614,205 555,272 383,451Transportation and travel 531,087 118,911 67,161Insurance 163,801 172,498 61,909Contract labor 101,587 423,156 412,743Others 1,724,394 1,424,174 1,335,789

P=49,318,294 P=50,014,366 P=43,169,110

General and administrative expenses included in the consolidated statement of income are as follows:

2009 2008 2007(In Thousands)

Personnel costs (Notes 25, 26 and 29) P=4,661,710 P=4,753,473 P=4,168,554Depreciation and amortization 870,997 1,119,147 1,016,947Professional fees 817,167 616,969 796,979Taxes and licenses 428,525 454,387 530,583Rental and utilities 384,790 298,472 357,666Transportation and travel 264,030 338,855 376,087Provision for doubtful accounts (Note 6) 217,208 88,871 127,701Advertising and promotions 182,492 420,620 234,330Postal and communication 179,638 157,226 153,649Repairs and maintenance 128,511 116,317 132,257Contract labor 125,750 39,677 36,952Entertainment, amusement and recreation 124,712 129,273 141,782Insurance 106,841 73,342 59,703Supplies 89,420 137,599 161,459Donations and contributions 67,129 123,312 126,541Dues and fees 55,041 66,365 61,033Research and development 29,339 48,685 189,693Others 481,270 502,924 826,390

P=9,214,570 P=9,485,514 P=9,498,306

55

128 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Depreciation and amortization expense included in the consolidated statement of income follows:

2009 2008 2007(In Thousands)

Included in:Cost of sales and services P=2,474,988 P=1,821,069 P=1,971,932General and administrative expenses 870,997 1,119,147 1,016,947

P=3,345,985 P=2,940,216 P=2,988,879

Personnel costs included in the consolidated statements of income follow:

2009 2008 2007(In Thousands)

Included in:Cost of sales and services P=5,279,394 P=6,782,659 P=5,215,984General and administrative expenses 4,661,710 4,753,473 4,168,554

P=9,941,104 P=11,536,132 P=9,384,538

Interest expense and other financing charges consist of:

2009 2008 2007(In Thousands)

Interest expense on:Short-term debt P=271,057 P=244,466 P=321,891Long-term debt 3,475,297 3,216,017 3,544,488

Hedging losses (Note 8) – 1,455,952 –Dividends on preferred shares – – 154,335Others 75,988 20,673 99,446

P=3,822,342 P=4,937,108 P=4,120,160

During the first half of 2008, IMI entered into additional structured currency options for economic hedges. Theeconomic turn-around during the second quarter of 2008 led to a weaker peso which resulted in an unfavorableposition on IMI’s derivative transactions. In May 2008, the BOD of IMI approved the unwinding of four majorderivative contracts and IMI incurred unwinding costs amounting to $33.36 million or P=1.46 billion. The net changesin fair value of settled derivative instruments not designated as accounting hedges are included as part of “Interestexpense and other financing charges”. The fair value of settled instruments includes the unwinding costs ofUS$33.36 million for the year ended December 31, 2008.

Other charges consist of:

2009 2008 2007(In Thousands)

Provision for impairment lossesLand and improvements (Note 9) P=568,672 P=– P=–Inventories (Note 7) 78,091 136,630 –AFS financial assets (Note 11) – 1,106,451 –Property, plant and equipment (Note 13) – 73,403 –

Write-offs and other charges 350,265 – 669,949Impairment loss on goodwill – – 662,591Others 438,010 278,938 237,404

P=1,435,038 P=1,595,422 P=1,569,944

In 2009, write-offs and other charges include the write-down of ALI’s inventory from purchase of steel bars whichamounted to P=350.3 million. In 2007, write-offs and other charges include the write-down of investment propertiesdamaged by the Glorietta 2 explosion and related expenses incurred, and demolition and relocation costs as part ofthe ALI’s Ayala Center redevelopment program amounting to a total of P=213.7 million in 2007 (see Note 12).

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2009 ANNUAL REPORT 129

22. Business Combinations

PFRS 3 provides that if the initial accounting for a business combination can be determined only provisionally by theend of the period in which the combination is effected because either the fair values to be assigned to the acquiree’sidentifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined onlyprovisionally, the acquirer shall account for the combination using those provisional values. The acquirer shallrecognize any adjustments to those provisional values as a result of completing the initial accounting within twelvemonths of the acquisition date as follows: (i) the carrying amount of the identifiable asset, liability or contingent liabilitythat is recognized or adjusted as a result of completing the initial accounting shall be calculated as if its fair value atthe acquisition date had been recognized from that date; (ii) goodwill or any gain recognized shall be adjusted by anamount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingentliability being recognized or adjusted; and (iii) comparative information presented for the periods before the initialaccounting for the combination is complete shall be presented as if the initial accounting has been completed from theacquisition date.

2009 Acquisitions

On-Site Sourcing, Inc.On April 30, 2009, Integreon acquired On-Site Sourcing, Inc. (Onsite) for a total consideration of US$6.8 million.

Following is a summary of the fair values of the assets acquired and liabilities assumed of Onsite as of the date of theacquisition:

Fair ValueRecognized on Acquisition

In US$ In Php*(In Thousands)

Cash and cash equivalents US$282 P=13,635Current assets 5,882 284,395Property and equipment - net 3,640 175,994

9,804 474,024Current liabilities 1,875 90,656Deferred tax liability 2,396 115,847

4,271 206,503Net assets 5,533 267,521Intangible assets arising on acquisition:

Customer relationships 5,800 280,340Software 300 14,505

Bargain purchase gain (Note 21) (4,878) (235,851)Total consideration paid in cash US$6,755 P=326,515*Translated using the exchange rate at the transaction date (US$1:P=48.35)

Cash flow on acquisition follows:

In US$ In Php*(In Thousands)

Net cash acquired with the subsidiary US$282 P=13,635Cash paid 6,755 326,515Net cash outflow US$6,473 P=312,880*Translated using the exchange rate at the transaction date (US$1:P=48.35)

From the date of acquisition, Onsite has contributed US$6.29 million (P=299.58 million) to the net income of the Group.If the contribution had taken place at the beginning of the year, the net income of the Group would have increased byUS$0.67 million (P=31.91 million) and revenue would have increased by US$7.84 million (P=373.40 million) in 2009.

In accordance with PFRS 3, the bargain purchase gain is recognized in the consolidated statement of income(see Note 21).

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130 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

GrailOn October 30, 2009, Integreon acquired the assets of Grail, along with the share capital of its subsidiaries, from theMonitor Group for a total consideration of US$11.8 million.

The following is a summary of the provisional fair values of the assets acquired and liabilities assumed as of the dateof the acquisition. The purchase price allocation has been prepared on a preliminary basis and reasonable changesare expected as additional information becomes available.

Fair ValueRecognized on AcquisitionIn US$ In Php*

(In Thousands)Cash and cash equivalents US$155 P=7,396Trade and other receivables 798 38,012Other current assets 273 13,008Property and equipment - net 545 25,958Other noncurrent assets 401 19,100

2,172 103,474Accounts payable and accrued expenses 1,850 88,106Other current liabilities 8 390Other noncurrent liabilities 55 2,640

1,913 91,136Net assets 259 12,338Goodwill arising on acquisition 11,558 550,506Total consideration US$11,817 P=562,844*Translated using the exchange rate at the transaction date (US$1:P=47.63)

Cost of the acquisition follows:

In US$ In Php*(In Thousands)

Cash paid US$10,389 P=494,828Shares issued 1,022 48,678Transaction costs 406 19,338

US$11,817 P=562,844*Translated using the exchange rate at the transaction date (US$1:P=47.63)

Cash flow on acquisition follows:

In US$ In Php*(In Thousands)

Net cash acquired with the subsidiary US$155 P=7,396Cash paid 10,389 494,828Net cash outflow US$10,234 P=487,432*Translated using the exchange rate at the transaction date (US$1:P=47.63)

From the date of acquisition, Grail has contributed US$0.42 million (P=20.00 million) to the net income of the Group.If the contribution had taken place at the beginning of the year, the net income of the Group would have increased byUS$0.46 million (P=21.91 million) and revenue would have increased by US$7.03 million (P=334.82 million) in 2009.

2008 Acquisitions

DatumOn May 30, 2008, Integreon Managed Solutions, Inc. (IMSI), a wholly owned subsidiary of Integreon which in turn is asubsidiary of LIL, acquired 100% of Datum.

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2009 ANNUAL REPORT 131

The purchase price allocation has been prepared on a preliminary basis as of December 31, 2008. The following is asummary of the provisional fair values of the assets acquired and liabilities assumed as of the date of the acquisition:

Fair ValueRecognized on Acquisition

In US$ In Php*(In Thousands)

Cash and cash equivalents US$530 P=23,261Trade and other receivables 2,156 94,667Other current assets 68 2,998Property and equipment - net 364 15,987Other noncurrent assets 12 506

3,130 137,419Accounts payable and accrued expenses 1,324 58,149Other current liabilities 450 19,780Other noncurrent liabilities 128 5,575

1,902 83,504Net assets 1,228 53,915Intangible assets arising on acquisition 3,500 153,680Goodwill arising on acquisition 3,678 161,511Total consideration US$8,406 P=369,106*Translated using the exchange rate at the transaction date (US$1:P=43.91)

Cost of the acquisition follows:

In US$ In Php*(In Thousands)

Cash paid US$7,289 P=320,066Shares issued 631 27,701Transaction costs 486 21,339

US$8,406 P=369,106*Translated using the exchange rate at the transaction date (US$1:P=43.91)

Cash flow on acquisition follows:

In US$ In Php*(In Thousands)

Net cash acquired with the subsidiary US$530 P=23,261Cash paid 7,775 341,405Net cash outflow US$7,245 P=318,144*Translated using the exchange rate at the transaction date (US$1:P=43.91)

From the date of acquisition, Datum has contributed P=38.9 million to the net income of the Group. If the contributionhad taken place at the beginning of the year, the net income of the Group would have increased by P=111.2 millionand revenue would have increased by P=417.2 million in 2008.

In 2009, IMSI finalized its purchased price allocation and there were no significant changes to the fair values of theassets acquired and liabilities assumed of Datum. In 2009, IMSI paid an earn-out as consideration for the acquisitionof Datum. This was reflected as additional goodwill.

APPHCIn 2006, ALI signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments Ltd. (FIL) to jointlydevelop a business process outsourcing office building in Dela Rosa Street and to purchase the existingPeopleSupport Building.

As of December 31, 2007, APPHC, the joint-venture company, is 60% owned by ALI. APPHC owns 60% interest inits subsidiary, APPCo. The remaining 40% interest in both APPHC and APPCo. are split evenly between MIL andFIL. APPHC and APPCo. are jointly controlled by ALI, MIL, and FIL.

59

132 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

On December 8, 2008, ALI acquired from FIL its 20% ownership in APPHC and APPCo. This resulted in an increasein ALI’s effective ownership interest in APPHC from 60% to 80% and APPCo. from 36% to 68%, thereby providing ALIwith the ability to control the operations of APPHC and APPCo. following the acquisition. Accordingly, APPHC andAPPCo.’s financial statements are consolidated on a line-by-line basis with that of the Group as of December 31,2008.

Following is a summary of the fair values of the identifiable assets acquired and liabilities assumed of APPHC andAPPCo. as of the date of acquisition (in thousands):

AssetsCash and cash equivalents P=227,266Trade and other receivables 188,974Other current assets 649,154Investment property - net (Note 12) 3,944,127Property and equipment - net (Note 13) 1,290,979Other assets 21,304

6,321,804LiabilitiesAccounts and other payables 716,815Deposits and other current liabilities 41,171Loans payable 3,282,150Deposits and other noncurrent liabilities 288,287

4,328,423Net assets 1,993,381Noncontrolling interests in APPHC (800,392)

1,192,989Net assets of APPHC acquired 238,678Noncontrolling interests in APPCo. acquired 400,196Total net assets acquired 638,874Acquisition cost 638,874Cash and cash equivalents acquired with the subsidiary 227,266Acquisition cost, net of cash acquired P=411,608

From the date of acquisition, APPHC and APPCo’s additional contribution to the Group’s net income is immaterial.Had the combination taken place at the beginning of the year, the net income of the Group would have increased byP=14.1 million and revenue from continuing operations would have increased by P=323.9 million in 2008.

Total costs directly attributable to the business combination amounted to P=15.6 million.

In 2009, ALI finalized its purchase price allocation which resulted in adjustments to the fair value of investmentproperties and property, plant and equipment. The related 2008 comparative information has been restated to reflectthese adjustments. The value of investment properties and property, plant and equipment increased (decreased) byP=286.5 million and (P=1.7 million), respectively. There was also a corresponding deduction in goodwill amounting toP=148.7 million and an increase in noncontrolling interest amounting to P=136.1 million. The increase in depreciationand amortization charge on investment properties and property, plant and equipment was not material.

60

2009 ANNUAL REPORT 133

23. Income Taxes

The components of the Group’s deferred taxes as of December 31, 2009 and 2008 are as follows:

Net deferred tax assets

2009 2008(In Thousands)

Deferred tax assets on:Allowance for probable losses P=832,834 P=796,299Unrealized gain, deposits and accruals for various

expenses on real estate transactions 321,177 446,236Retirement benefits 100,466 144,850Share-based payments 82,784 62,265NOLCO 19,052 28,854MCIT 27,323 5,214Others 484,134 233,895

1,867,770 1,717,613Deferred tax liabilities on:

Capitalized interest and other expenses (471,778) (553,912)Others – (30,854)

(471,778) (584,766)Net deferred tax assets P=1,395,992 P=1,132,847

Net deferred tax liabilities

2009 2008(In Thousands)

Deferred tax assets on:Unrealized gain, deposits and accruals for various

expenses on real estate transactions P=17 P=63,593NOLCO – 36,984Others 809 13,347

826 113,924Deferred tax liabilities on:

Excess of financial realized gross profit over taxablerealized gross profit (147,368) (137,854)

Capitalized interest and other expenses (37,151) (117,271)Others (23,732) (44,335)

(208,251) (299,460)Net deferred tax liabilities (P=207,425) (P=185,536)

The Group has NOLCO amounting to P=5.6 billion and P=7.2 billion in 2009 and 2008, respectively, which were notrecognized. Further, deferred tax assets from the excess MCIT over regular corporate income tax amounting toP=38.6 million in 2009 and P=41.2 million in 2008 and from unrealized gain on real estate sales amounting toP=4.8 million as of December 31, 2007, respectively, were also not recognized, since management believes that therewould not be sufficient taxable income against which the benefits of the deferred tax assets may be utilized.

As of December 31, 2009, NOLCO and MCIT that can be claimed as deduction from future taxable income or used asdeductions against income tax liabilities are as follows:

Year incurred Expiry Date NOLCO MCIT(In Thousands)

2007 2010 P=2,095,519 P=20,2482008 2011 2,282,936 17,4822009 2012 1,336,734 28,197

P=5,715,189 P=65,927

At December 31, 2009 and 2008, deferred tax liabilities have not been recognized on the undistributed earnings andcumulative translation adjustment of foreign subsidiaries, associates and jointly controlled entities since the timing ofthe reversal of the temporary difference can be controlled by the Group and management does not expect thereversal of the temporary differences in the foreseeable future. The undistributed earnings and cumulative translationadjustment amounted to P=1,626.7 million and P=2,051.0 million as of December 31, 2009 and 2008, respectively.

61

134 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

The reconciliation between the statutory and the effective income tax rates follows:

2009 2008 2007Statutory income tax rate 30.00% 35.00% 35.00%Tax effects of:

Gain on sale of shares and capitalgains tax (3.20) (7.43) (17.56)

Nontaxable equity in net earnings ofassociates and jointly controlledentities (17.67) (19.80) (16.70)

Interest income subjected to final taxat lower rates (0.97) (2.45) (1.82)

Income under income tax holiday (0.16) (0.22) (0.04)Effect of change in tax rate – 0.90 –Others 5.59 12.49 10.81

Effective income tax rate 13.59% 18.49% 9.69%

As of December 31, 2008, the deferred tax assets and liabilities are set-up based on the 30% corporate tax rate whichbecame effective beginning January 1, 2009 as provided under Republic Act No. 9337.

24. Earnings Per Share

The following table presents information necessary to calculate EPS on net income attributable to equity holders ofthe Company:

2009 2008 2007(In Thousands, except EPS figures)

Net income P=8,154,345 P=8,108,597 P=16,256,601Less dividends on preferred stock 1,081,352 548,552 548,552

P=7,072,993 P=7,560,045 P=15,708,049Weighted average number of common shares 496,984 496,756 496,787Dilutive shares arising from stock options 1,541 1,719 2,374Adjusted weighted average number of

common shares for diluted EPS 498,525 498,475 499,161Basic EPS P=14.23 P=15.22 P=31.62Diluted EPS P=14.19 P=15.17 P=31.47

EPS on income before income associated with noncurrent assets held for sale attributable to equity holders of theCompany follows:

2009 2008 2007(In Thousands, except EPS figures)

Income before income associated withnoncurrent assets held for sale P=10,804,887 P=10,658,688 P=18,437,341

Less: Income before income associated withnoncurrent assets held for saleassociated to minority interests 2,650,542 2,550,091 2,665,546

Less: Dividends on preferred stock 1,081,352 548,552 548,552P=7,072,993 P=7,560,045 P=15,223,243

Weighted average number of common sharesfor basic EPS 496,984 496,756 496,787

Dilutive shares arising from stock options 1,541 1,719 2,374Adjusted weighted average number of

common shares for diluted EPS 498,525 498,475 499,161Basic EPS P=14.23 P=15.22 P=30.64Diluted EPS P=14.19 P=15.17 P=30.50

62

2009 ANNUAL REPORT 135

25. Retirement Plan

The Company and certain subsidiaries have their respective funded, noncontributory tax-qualified defined benefit typeof retirement plans covering substantially all of their employees. The benefits are based on defined formula withminimum lump-sum guarantee of 1.5 months effective salary per year of service. The consolidated retirement costscharged to operations amounted to P=344.4 million in 2009, P=195.6 million in 2008 and P=331.5 million in 2007.

The principal actuarial assumptions used to determine the pension benefits with respect to the discount rate, salaryincreases and return on plan assets were based on historical and projected normal rates. The Company’s and certainsubsidiaries’ annual contributions to their respective plans consist of payments covering the current service cost forthe year and the required funding relative to the guaranteed minimum benefits as applicable.

The components of retirement expense in the consolidated statement of income are as follows:

2009 2008 2007(In Thousands)

Current service cost P=261,116 P=263,055 P=260,685Interest cost on benefit obligation 307,200 215,771 158,528Expected return on plan assets (255,016) (247,462) (167,940)Net actuarial gain 30,401 (29,573) (18,715)Past service cost 2,532 2,796 98,539Curtailment loss (gain) 382,296 (11,447) –Settlement gain (384,170) – –Effect of ceiling limit – 2,504 357Total retirement expense P=344,359 P=195,644 P=331,454Actual return (loss) on plan assets P=453,834 (P=410,372) P=244,109

The funded status and amounts recognized in the consolidated statement of financial position for the pension planassets of subsidiaries in a net pension asset position as of December 31, 2009 and 2008 are as follows:

2009 2008(In Thousands)

Benefit obligation (P=244,605) (P=306,808)Plan assets 508,082 730,490

263,477 423,682Unrecognized net actuarial gains (131,058) (306,294)Assets recognized in the consolidated statements of

financial position P=132,419 P=117,388

The funded status and amounts recognized in the consolidated statement of financial position for the pension planliabilities of the Company and subsidiaries in a net pension liability position as of December 31, 2009 and 2008 are asfollows:

2009 2008(In Thousands)

Benefit obligation (P=3,529,634) (P=3,136,033)Plan assets 3,147,837 2,283,634

(381,797) (852,399)Unrecognized net actuarial losses 125,793 331,431Unrecognized past service cost 27,692 30,224Liabilities recognized in the consolidated statements of

financial position (P=228,312) (P=490,744)

63

136 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Changes in the present value of the combined defined benefit obligation are as follows:

2009 2008(In Thousands)

Balance at January 1 P=3,442,841 P=3,708,898Interest cost on benefit obligation 307,200 215,771Current service cost 261,116 263,055Benefits paid (282,615) (342,328)Actuarial loss (gains) on obligations 180,934 (214,791)Benefits obligation from acquired subsidiary 125 –Curtailments 281,525 (34,104)Settlements (416,887) (153,679)Past service cost – 19Balance at December 31 P=3,774,239 P=3,442,841

Changes in the fair value of the combined plan assets are as follows:

2009 2008(In Thousands)

Balance at January 1 P=3,014,124 P=3,734,339Expected return 255,016 247,462Contributions by employer 652,516 186,164Benefits paid (282,615) (342,328)Settlements (181,940) (153,679)Actuarial gains (losses) on plan assets 198,818 (657,834)Balance at December 31 P=3,655,919 P=3,014,124

The assumptions used to determine pension benefits for the Group are as follows:

2009 2008Discount rates 9.5% to 15.0% 7.0 to 13.4%Salary increase rates 6.0% to 10.0% 4.5 to 8.0%Expected rates of return on plan assets 4.0% to 11.0% 3.0 to 8.0%

The allocation of the fair value of plan assets of the Group follows:

2009 2008Investments in debt securities 69.0% 51.4%Investments in equity securities 23.5% 25.0%Others 7.5% 23.6%

Amounts for the current and previous annual periods are as follows:

2009 2008 2007 2006 2005(In Thousands)

Defined benefit obligation (P=3,774,239) (P=3,442,841) (P=3,708,898) (P=4,012,650) (P=3,026,065)Plan assets 3,655,919 3,014,124 3,734,339 3,508,563 2,910,036Excess (deficit) (P=118,320) (P=428,717) P=25,441 (P=504,087) (P=116,029)

Gains (losses) on experience adjustments are as follows:

2009 2008 2007(In Thousands)

Defined benefit obligation P=19,482 (P=566,144) P=136,564Plan assets 198,818 (657,834) 30,727

The Company expects to contribute P=113.4 million to its defined benefit pension plan in 2010.

As of December 31, 2009 and 2008, the plan assets include shares of stock of the Company with total fair value ofP=196.5 million and P=357.8 million, respectively.

The overall expected rate of return on assets is determined based on the market prices prevailing on that date.

64

2009 ANNUAL REPORT 137

26. Stock Option Purchase Plans

The Company has stock option plans for key officers (Executive Stock Option Plan - ESOP) and employees(Employee Stock Ownership Plan - ESOWN) covering 3.0% of the Company’s authorized capital stock. The granteesare selected based on certain criteria like outstanding performance over a defined period of time.

The ESOP grantees may exercise in whole or in part the vested allocation in accordance with the vesting percentageand vesting schedule stated in the ESOP. Also, the grantee must be an employee of the Company or any of itssubsidiaries during the 10-year option period. In case the grantee retires, he is given 3 years to exercise his vestedand unvested options. In case the grantee resigns, he is given 90 days to exercise his vested options.

ESOP

A summary of the Company’s stock option activity and related information for the years ended December 31, 2009,2008 and 2007 follows:

2009 2008 2007

Numberof Shares

WeightedAverageExercise

PriceNumber

of Shares

WeightedAverageExercise

PriceNumber

of Shares

WeightedAverageExercise

PriceOutstanding, at beginning of

year 3,352,018 P=141.18 2,837,102 P=170.30 2,533,908 P=205.13Exercised (11,900) (143.51) (52,499) (150.99) (169,656) (203.37)Adjustment due to 20% stock

dividends (Note 20) – – 567,415 – 472,850 –Outstanding, at end of year 3,340,118 P=141.17 3,352,018 P=141.18 2,837,102 P=170.30

The options have a contractual term of 10 years. As of December 31, 2009 and 2008, the weighted averageremaining contractual life of options outstanding is 3.16 years and 4.3 years, respectively, and the range of exerciseprices amounted from P=107.29 to P=204.86.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The fairvalues of stock options granted under ESOP at each grant date and the assumptions used to determine the fair valueof the stock options are as follows:

June 30, 2005 June 10, 2004Weighted average share price P=327.50 P=244.00Exercise price P=295.00 P=220.00Expected volatility 46.78% 46.71%Option life 10 years 10 yearsExpected dividends 1.27% 1.43%Risk-free interest rate 12.03% 12.75%

The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may alsonecessarily be the actual outcome.

ESOWN

The Company also has ESOWN granted to qualified officers and employees wherein grantees may subscribe inwhole or in part to the shares awarded to them based on the 10% discounted market price as offer price set at grantdate. To subscribe, the grantee must be an employee of the Group during the 10-year payment period. In case thegrantee resigns, unsubscribed shares are cancelled, while the subscription may be paid up to the percent of holdingperiod completed and payments may be converted into the equivalent number of shares. In case the grantee isseparated, not for cause, but through retrenchment and redundancy, subscribed shares may be paid in full,unsubscribed shares may be subscribed, or payments may be converted into the equivalent number of shares. Incase the grantee retires, the grantee may subscribe to the unsubscribed shares anytime within the 10-year period.The plan does not allow sale or assignment of the shares. All shares acquired through the plan are subject to theCompany’s Right to Repurchase.

65

138 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Shares granted and subscribed under the ESOWN follows:

2009 2008Granted 1,831,782 1,015,200Subscribed 1,813,994 898,260Exercise price P=180.13 P=284.96

Subscriptions receivable from the stock option plans covering the Company’s shares are presented under equity.

For the unsubscribed shares, the employee still has the option to subscribe from the start of the fifth year but not laterthan on the start of the seventh year from date of grant. Movements in the number of options outstanding underESOWN as of December 31, 2009 and 2008 follow:

2009 2008

Number ofoptions

Weightedaverageexercise

priceNumber of

options

Weightedaverageexercise

priceAt January 1 190,795 P=251.39 61,546 P=237.88Granted 17,788 180.13 116,940 284.96Exercised/cancelled (48,433) (222.07) – –Adjustment due to 20% stock

dividends (Note 20) – – 12,309 –At December 31 160,150 P=252.34 190,795 P=251.39

The fair value of stock options granted is estimated on the date of grant using the Black-Scholes Merton Formula,taking into account the terms and conditions upon which the options were granted. The expected volatility wasdetermined based on an independent valuation. The fair value of stock options granted under ESOWN at grant dateand the assumptions used to determine the fair value of the stock options follow:

April 30, 2009 May 15, 2008Number of unsubscribed shares 17,788 116,940Fair value of each option P=112.87 P=137.45Weighted average share price P=263.38 P=316.50Exercise price P=180.13 P=284.96Expected volatility 49.88% 30.63%Dividend yield 1.59% 1.56%Interest rate 7.49% 8.23%

Total expense arising from share-based payments recognized by the Group in the consolidated statement of incomeamounted to P=471.6 million in 2009, P=342.9 million in 2008 and P=288.0 million in 2007.

27. Operating Segment Information

For management purposes, the Group is organized into the following business units:

a. Real estate and hotelsb. Financial services and bancassurancec. Telecommunicationsd. AC Capital

Real estate and hotels - planning and development of large-scale fully integrated residential and commercialcommunities; development and sale of residential, leisure and commercial lots and the development and leasingof retail and office space and land in these communities; construction and sale of residential condominiums andoffice buildings; development of industrial and business parks; development and sale of upper middle-incomeand affordable housing; strategic land bank management; hotel, cinema and theater operations; and constructionand property management.

66

2009 ANNUAL REPORT 139

Financial services and bancassurance - universal banking operations, including savings and time deposits inlocal and foreign currencies; commercial, consumer, mortgage and agribusiness loans; leasing; paymentservices, including card products, fund transfers, international trade settlement and remittances from overseasworkers; trust and investment services including portfolio management, unit funds, trust administration and estateplanning; fully integrated bancassurance operations, including life, non-life, pre-need and reinsurance services;internet banking; on-line stock trading; corporate finance and consulting services; foreign exchange andsecurities dealing; and safety deposit facilities.

Telecommunications - provider of digital wireless communications services, wireline voice communicationservices, consumer broadband services, other wireline communication services, domestic and international longdistance communication or carrier services and mobile commerce services.

AC Capital - the business unit that oversees the financial performance of subsidiaries other than the three majorbusinesses of the Group. AC Capital also provides support to subsidiaries’ growth initiatives and seeks newinvestment opportunities for the Group that will complement existing business and further enhance the Group’svalue. AC Capital has the following operating segments:

Electronics - electronics manufacturing services provider for original equipment manufacturers in thecomputing, communications, consumer, automotive, industrial and medical electronics markets, serviceprovider for test development and systems integration and distribution of related products and services.

Information technology and BPO services - venture capital for technology businesses and emerging markets;provision of value-added content for wireless services, on-line business-to-business and business-to-consumer services; electronic commerce; technology infrastructure hardware and software sales andtechnology services; and onshore and offshore outsourcing services in the research, analytics, legal,electronic discovery, document management, finance and accounting, IT support, graphics, advertisingproduction, marketing and communications, human resources, sales, retention, technical support andcustomer care areas.

Water utilities - contractor to manage, operate, repair, decommission, and refurbish all fixed and movableassets (except certain retained assets) required to provide water delivery services and sewerage services inthe East Zone Service Area.

Automotive - manufacture and sale of passenger cars and commercial vehicles.

International - investments in overseas property companies and projects.

Others - air-charter services, agri-business and others.

Management monitors the operating results of its business units separately for the purpose of making decisions aboutresource allocation and performance assessment. Segment performance is evaluated based on operating profit orloss and is measured consistently with operating profit or loss in the consolidated financial statements.

Intersegment transfers or transactions are entered into under the normal commercial terms and conditions that wouldalso be available to unrelated third parties. Segment revenue, segment expense and segment results includetransfers between operating segments. Those transfers are eliminated in consolidation.

67

140 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

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979)

P=96,

853

Def

erre

d ta

xlia

bilit

ies

–15

1–

––

542

55

–20

8

Tota

l lia

bilit

ies

P=45,

248

P=48,

877

P=–P=–

P=–P=6

,246

P=3,1

39P=8

98P=1

,632

(P=8,

979)

P=97,

061

Seg

men

tadd

ition

s to

prop

erty

,pla

ntan

d

equi

pmen

tand

inve

stm

entp

rope

rties

P=77

P=4,8

95P=–

P=–P=–

P=387

P=407

P=23

P=414

P=–P=6

,203

Dep

reci

atio

nan

dam

ortiz

atio

nP=–

P=1,7

94P=–

P=–P=–

P=997

P=339

P=4P=1

09P=–

P=3,2

43

Non

-cas

hex

pens

esot

her t

han

depr

ecia

tion

and

amor

tizat

ion

P=116

P=1,2

87P=–

P=–P=–

P=67

P=75

P=–P=3

P=–P=1

,548

68

2009 ANNUAL REPORT 141

2008

AC

Cap

ital

Par

ent C

ompa

nyR

ealE

stat

ean

d H

otel

s

Fina

ncia

lS

ervi

ces

and

Ban

cass

uran

ceTe

leco

mm

unic

atio

nsW

ater

Util

ities

Ele

ctro

nics

Info

rmat

ion

Tech

nolo

gyan

dB

PO

Ser

vice

sIn

tern

atio

nal

Aut

omot

ive

and

Oth

ers

Inte

rseg

men

tE

limin

atio

nsC

onso

lidat

ed

Rev

enue

Sal

es to

exte

rnal

cust

omer

sP=

–P=

30,6

79P=

–P=

–P=

–P=

20,3

06P=

2,61

1P=

–P=

10,4

57P=

–P=

64,0

53In

ters

egm

ent

–63

––

––

(15)

––

(48)

–

Equ

ityin

nete

arni

ngs

ofas

soci

ates

and

join

tlyco

ntro

lled

entit

ies

788

52,

145

3,64

390

7–

(122

)(1

44)

75–

7,39

6In

tere

stin

com

e1,

234

925

––

–53

892

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0)2,

243

Oth

erin

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e3,

591

1,33

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261

417

820

7(1

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Tota

lrev

enue

4,83

233

,883

2,14

53,

643

907

20,6

202,

486

126

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73)

79,1

09

Ope

ratin

gex

pens

es1,

429

24,5

91–

––

19,3

873,

391

271

10,5

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59,4

98

Ope

ratin

gpr

ofit

3,40

39,

292

2,14

53,

643

907

1,23

3(9

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(145

)17

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11

Inte

rest

expe

nse

and

othe

r fin

anci

ng

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ges

2,29

81,

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––

–1,

607

128

34(7

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Oth

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s99

937

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7916

117

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1,59

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rovi

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97

(2)

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9

Inco

me

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re in

com

eas

soci

ated

with

nonc

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sets

held

fors

ale

(91)

5,80

12,

145

3,64

390

7(5

62)

(940

)(2

68)

99(7

5)10

,659

Inco

me

asso

ciat

edw

ithno

ncur

rent

asse

tshe

ldfo

rsal

e,ne

toft

ax–

––

––

––

––

––

Net

inco

me

(P=91

)P=

5,80

1P=

2,14

5P=

3,64

3P=

907

(P=56

2)(P=

940)

(P=26

8)P=

99(P=

75)

10,6

59

Oth

er in

form

atio

nS

egm

enta

sset

sP=

102,

725

P=92

,462

P=–

P=–

P=–

P=14

,603

P=4,

442

P=3,

577

P=2,

226

(P=69

,121

)P=

150,

914

Inve

stm

enti

nas

soci

ates

and

join

tly

cont

rolle

den

titie

s50

,857

9,91

6–

––

3,90

62,

952

510

–68

,141

Def

erre

d ta

xas

sets

–79

5–

––

153

–36

248

1,13

3

Tota

lass

ets

P=15

3,58

2P=

103,

173

P=–

P=–

P=–

P=14

,604

P=8,

401

P=6,

529

P=2,

772

(P=68

,873

)P=

220,

188

Seg

men

tlia

bilit

ies

P=47

,720

P=45

,248

P=–

P=–

P=–

P=6,

882

P=92

8P=

537

P=1,

140

(P=10

,640

)P=

91,8

15

Def

erre

d ta

xlia

bilit

ies

–16

2–

––

–12

66

–18

6

Tota

l lia

bilit

ies

P=47

,720

P=45

,410

P=–

P=–

P=–

P=6,

882

P=94

0P=

543

P=1,

146

(P=10

,640

)92

,001

Seg

men

tadd

ition

s to

prop

erty

,pla

ntan

deq

uipm

enta

ndin

vest

men

tpro

perti

esP=

84P=

4,91

8P=

–P=

–P=

–P=

731

P=64

6P=

5P=

355

P=–

P=6,

739

Dep

reci

atio

nan

dam

ortiz

atio

n92

1,25

9–

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936

558

491

–2,

940

Non

-cas

hex

pens

esot

her t

han

depr

ecia

tion

and

amor

tizat

ion

P=1,

024

P=46

2P=

–P=

–P=

–P=

166

P=9

P=22

1P=

–P=

–P=

1,88

2

69

142 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

2007

AC

Cap

ital

Par

ent C

ompa

nyR

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ean

d H

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and

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ities

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onso

lidat

ed

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enue

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es to

exte

rnal

cust

omer

sP=

–P=

22,9

62P=

–P=

–P=

–P=

19,5

26P=

2,12

9P=

–P=

11,9

61P=

–P=

56,5

78In

ters

egm

ent

–74

––

––

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–(7

4)–

Equ

ityin

nete

arni

ngs

ofas

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ates

and

join

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lled

entit

ies

6180

43,

291

4,54

580

0–

(28)

226

68–

9,76

7In

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stin

com

e1,

233

597

––

–66

1111

42

(330

)1,

693

Oth

erin

com

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854

1,45

9–

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165

2215

726

4(1

93)

10,7

28

Tota

lrev

enue

10,1

4825

,896

3,29

14,

545

800

19,7

572,

134

497

12,2

95(5

97)

78,7

66

Ope

ratin

gex

pens

es1,

819

17,9

28–

––

17,7

613,

036

242

12,0

24(1

43)

52,6

67

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ratin

gpr

ofit

8,32

97,

968

3,29

14,

545

800

1,99

6(9

02)

255

271

(454

)26

,099

Inte

rest

expe

nse

and

othe

r fin

anci

ng

char

ges

3,31

686

8–

––

215

209

22(3

30)

4,12

0

Oth

erch

arge

s2

874

––

–21

663

–10

–1,

570

Pro

visi

on fo

rinc

ome

tax

140

1,56

7–

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150

1723

6312

1,97

2

Inco

me

befo

re in

com

eas

soci

ated

with

nonc

urre

ntas

sets

held

fors

ale

4,87

14,

659

3,29

14,

545

800

1,61

0(1

602)

223

176

(136

)18

,437

Inco

me

asso

ciat

edw

ithno

ncur

rent

asse

tshe

ldfo

rsal

e,ne

toft

ax–

599

––

––

–26

––

625

Net

inco

me

P=4,

871

P=5,

258

P=3,

291

P=4,

545

P=80

0P=

1,61

0(P=

1,60

2)P=

249

P=17

6(P=

136)

P=19

,062

70

2009 ANNUAL REPORT 143

Geographical Segments

Revenue Segment Assets

Investment Properties andProperty, Plant and

Equipment Additions2009 2008 2007 2009 2008 2009 2008

Philippines P=60,284,336 P= 63,077,576 P=56,931,668 P=212,727,696 P=205,816,750 P=5,850,799 P=5,340,557Japan 1,023,625 1,083,135 9,400,556 12,532 13,020 254 199USA 6,253,443 6,736,608 6,081,976 10,667,684 6,048,504 181,336 919,310Europe 5,594,446 4,471,487 3,525,576 111,678 – – –Others (mostly Asia) 3,137,965 3,739,847 2,827,080 8,959,445 8,309,613 171,152 478,982

P=76,293,815 P=79,108,653 P=78,766,856 P=232,479,035 P=220,187,887 P=6,203,541 P=6,739,048

Summarized financial information of BPI, Globe and MWCI are presented in Note 10 to the consolidated financialstatements.

28. Leases

Finance leases - as lesseeForeign subsidiaries conduct a portion of their operations from leased facilities, which include office equipment.These leases are classified as finance leases and expire over the next 5 years. The average discount rate implicit inthe lease is 8.5% per annum in 2009 and 2008. Future minimum lease payments under the finance leases togetherwith the present value of the net minimum lease payments follow:

2009 2008Minimum

paymentsPresent values

of paymentsMinimumpayments

Present valuesof payments

(In Thousands)Within one year P=13,448 P=11,866 P=1,036 P=980After one year but not more than five years 23,987 21,982 14 13Total minimum lease payments 37,435 33,848 1,050 993Less amounts representing finance charges 3,587 – 57 –Present value of minimum lease payments P=33,848 P=33,848 P=993 P=993

Operating lease commitments - as lesseeThe Group entered into lease agreements with third parties covering real estate properties. These leases generallyprovide for either (a) fixed monthly rent, or (b) minimum rent or a certain percentage of gross revenue, whichever ishigher.

Future minimum rentals payable under non-cancellable operating leases of lessee subsidiaries are as follows:

2009 2008(In Thousands)

Within one year P=300,933 P=154,923After one year but not more than five years 755,185 513,202More than five years 1,536,304 1,478,113

P=2,592,422 P=2,146,238

Operating leases - as lessorCertain subsidiaries have lease agreements with third parties covering its investment property portfolio. These leasesgenerally provide for either (a) fixed monthly rent, or (b) minimum rent or a certain percentage of gross revenue,whichever is higher.

Future minimum rentals receivable under non-cancellable operating leases of the Group are as follows:

2009 2008(In Thousands)

Within one year P=1,618,130 P=1,361,126After one year but not more than five years 4,789,404 3,783,681More than five years 3,349,840 1,405,812

P=9,757,374 P=6,550,619

71

144 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

29. Related Party Transactions

The Group, in its regular conduct of business, has entered into transactions with associates, jointly controlled entitiesand other related parties principally consisting of advances and reimbursement of expenses, purchase and sale ofreal estate properties, various guarantees, construction contracts, and development, management, underwriting,marketing and administrative service agreements. Sales and purchases of goods and services to and from relatedparties are made at normal market prices.

The effects of the foregoing are shown under the appropriate accounts in the consolidated financial statements asfollows (in thousands):

Receivable from related parties2009 2008

Associates:Interest in limited partnerships of AINA P=1,559,312 P=948,629CHI 120,791 85,587NTDCC 25,383 19Naraya Development Co. Ltd. 17,863 16,628Lagoon Development Corporation 15,337 25,626Arch Capital 908 611MD Express 144 19Accendo Commercial Corp. – 63,510

1,739,738 1,140,629Jointly controlled entities:

MWCI 48,113 3,840Globe 38,827 92,640ACC 15,929 7,457EGS Acquisition – 2,130,844EGS Corp. – 2,855,215

102,869 5,089,996Other related parties:

Glory High 571,467 642,308Columbus Holdings, Inc. (Columbus) 520,066 520,061Key management personnel 280,488 220,877Fort Bonifacio Development Corporation (FBDC) 87,296 247,428Ayala Systems Technology, Inc. 76,747 –PPI Prime Ventures, Inc. 5,946 –Innove Communications, Inc. (Innove) 4,890 4,806Honda Cars Philippines, Inc. (HCP) 603 –MyAyala 51 3,038

1,547,554 1,638,518P=3,390,161 P=7,869,143

Payable to related parties2009 2008

Associates:BLC P=78,829 P=–CHI 509 1,341Arch Capital 427 –

79,765 1,341Jointly controlled entities:

Asiacom 94 –Globe 13 116

107 116Other related parties:

Columbus 484,888 –Cebu Property Ventures and Development

Corporation 149,204 4,937HCP 69,665 121,447Green Horizons 13,455 6,371Innove 110 1,196Others 33,225 331

750,547 134,282P=830,419 P=135,739

72

2009 ANNUAL REPORT 145

Income2009 2008 2007

(In Thousands)Associates P=956,704 P=109,277 P=164,666Jointly controlled entities 140,652 229,954 71,895Other related parties 15,062 669,162 918,140

P=1,112,418 P=1,008,393 P=1,154,701

Cost and expenses2009 2008 2007

(In Thousands)Jointly controlled entities P=47,732 P=54,339 P=46,201Other related parties 7,294 12,983 1,938

P=55,026 P=67,322 P=48,139

Receivable from related parties include the following:

a. Receivables from AINA’s interest in limited partnerships are nontrade in nature and bear interests ranging from12% to 15%.

b. In 2008, AYC Holdings, Inc. issued promissory notes and advances to EGS Corp. and EGS Acquisitionamounting to P=4,986.1 million. The advances amounting to P=665.3 million is payable in one year and bearinterest at the rate of 12% per annum. The promissory notes amounting to P=4,320.8 million is payable over aperiod of five years and bear interest at the rate of 12% to 18% per annum. The notes and advances werepartially collected in October 1, 2009. The balance amounting to P=1,655.8 million owed by EGS Corp. wasassigned to NewBridge in 2009.

c. Promissory notes issued by BLC, which were assigned by MPC to ALI and Evergreen Holdings Inc. and theadvances subsequently made by ALI to FBDC to fund the completion of the Bonifacio Ridge project and to BLCto finance the costs to be incurred in relation to its restructuring program are due and demandable and bearinterest at the rates of 12% to 14% per annum.

d. Any other outstanding balances at the year-end are unsecured, interest free and will be settled in cash.

Allowance for doubtful accounts on amounts due from related parties amounted to P=5.2 million and P=8.0 million as ofDecember 31, 2009 and 2008, respectively. Reversal of provision for doubtful accounts in 2009 amounted toP=2.8 million and provision for doubtful accounts amounted to P=6.0 million in 2008 and P=1.7 million in 2007.

Compensation of key management personnel by benefit type follows:

2009 2008 2007(In Thousands)

Short-term employee benefits P=864,014 P=675,164 P=503,101Share-based payments (Note 26) 167,886 184,521 144,767Post-employment benefits (Note 25) 103,979 48,256 78,110

P=1,135,879 P=907,941 P=725,978

73

146 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

30. Financial Instruments

Fair Value of Financial InstrumentsThe table below presents a comparison by category of carrying amounts and estimated fair values of all of theGroup’s financial instruments (in thousands):

2009 2008Carrying Value Fair Value Carrying Value Fair Value

FVPL FINANCIAL ASSETSFinancial assets at FVPL P=926,860 P=926,860 P=2,233,201 P=2,233,201LOANS AND RECEIVABLESCash and cash equivalents 45,656,889 45,656,889 42,885,792 42,885,792Short-term investments 4,560,976 4,560,976 1,008,924 1,008,924Accounts and notes receivables

Trade receivablesReal estate 12,808,632 12,904,112 10,428,525 11,118,638Electronics manufacturing 3,867,003 3,867,003 3,115,891 3,115,891Automotive 818,850 818,850 639,346 639,346Information technology and BPO 799,783 799,783 332,964 332,964International and others 3,700 3,700 3,940 3,940

Total trade receivables 18,297,968 18,393,448 14,520,666 15,210,779Nontrade receivables

Advances to other companies 2,888,665 2,860,678 3,643,843 3,643,843Related parties 3,384,955 3,384,955 7,861,125 8,168,757Investments in bonds classified

as loans and receivables 200,000 200,000 – –Other receivables 514,018 514,018 1,455,732 1,435,553

Total nontrade receivables 6,987,638 6,959,651 12,960,700 13,248,153Total loans and receivables 75,503,471 75,570,964 71,376,082 72,353,648AFS FINANCIAL ASSETS

Quoted equity investments 877,509 877,509 1,449,982 1,449,982Unquoted equity investments 2,392,489 2,392,489 1,614,520 1,614,520Quoted debt investments 1,199,154 1,199,154 – –

Total AFS financial assets 4,469,152 4,469,152 3,064,502 3,064,502HTM INVESTMENTS

Quoted debt investments – – 65,405 68,695Total financial assets P=80,899,483 P=80,966,976 P=76,739,190 P=77,720,046OTHER FINANCIAL LIABILITIESCurrent other financial liabilitiesAccounts payable and accrued

expensesAccounts payable P=14,584,321 P=14,584,321 P=13,922,547 P=13,922,547Accrued expenses 6,152,842 6,152,842 6,821,712 6,821,712Dividends payable 2,264,306 2,264,306 1,333,740 1,333,740Accrued project cost 2,136,700 2,136,700 2,022,903 2,022,903Accrued personnel costs 427,502 427,502 823,717 823,717Interest payable 402,278 402,278 501,251 501,251Retentions payable 120,938 120,938 262,330 262,330Related Parties 105,355 105,355 135,739 135,739

Customers’ deposits 2,374,457 2,374,457 1,246,593 1,246,593Short-term debt 2,638,658 2,638,658 2,755,447 2,755,447Current portion of long-term debt 2,453,144 2,453,144 1,478,871 1,478,871Noncurrent other financial liabilities

Other noncurrent liabilities 8,083,130 8,042,012 7,016,372 7,022,465Long-term debt 51,431,583 53,331,913 50,250,151 51,849,121

Total other financial liabilities P=93,175,214 P=95,034,426 P=88,571,373 P=90,176,436

The following methods and assumptions were used to estimate the fair value of each class of financial instrument forwhich it is practicable to estimate such value:

Cash and cash equivalents, short-term investments and current receivables - Carrying amounts approximate fairvalues due to the relative short-term maturities of these investments.

Financial assets at FVPL - Fair values of investments in government securities are based on quoted prices as of thereporting date.

74

2009 ANNUAL REPORT 147

Noncurrent trade and nontrade receivables - The fair values are based on the discounted value of future cash flowsusing the applicable rates for similar types of instruments. The discount rates used ranged from 4.28% to 9.59% in2009 and 6.40% to 7.70% in 2008.

AFS quoted investments - Fair values are based on quoted prices published in markets.

AFS unquoted shares - Fair value of equity funds are based on the net asset value per share. For other unquotedequity shares where the fair value is not reasonably determinable due the unpredictable nature of future cash flowsand the lack of suitable method of arriving at a reliable fair value, these are carried at cost.

HTM investments - The fair value of bonds is based on quoted market prices.

Liabilities - The fair values of accounts payable and accrued expenses and short-term debt approximate the carryingamounts due to the short-term nature of these transactions.

The fair value of noncurrent other financial liabilities (fixed rate and variable rate loans repriced on a semi-annual/annual basis and deposits) are estimated using the discounted cash flow methodology using the currentincremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability beingvalued. The discount rates used ranged from 4.28% to 9.59% in 2009 and 6.60% to 7.70% in 2008.

For variable rate loans that reprice every three months, the carrying value approximates the fair value because ofrecent and regular repricing based on current market rates.

Fair value hierarchyThe Group uses the following hierarchy for determining and disclosing the fair value of financial instruments byvaluation technique:Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilitiesLevel 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable,either directly or indirectlyLevel 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based onobservable market data.

Financial assets at FVPL and quoted AFS financial assets amounting to P=440.6 million and P=2,076.7 million,respectively, were classified under the Level 1 category. There are no financial assets at FVPL and quoted AFSfinancial assets that have been classified under the Level 2 and 3 category.

During the reporting period ended December 31, 2009, there were no transfers between Level 1 and Level 2 fairvalue measurements, and no transfers into and out of Level 3 fair value measurements.

Risk Management and Financial Instruments

GeneralIn line with the corporate governance structure of the Company, the Company has adopted a group-wide enterpriserisk management framework in 2002. An Enterprise Risk Management Policy was approved by the Audit Committeein 2003, and was subsequently revised and approved on February 14, 2008. The policy was designed primarily toenhance the risk management process and institutionalize a focused and disciplined approach to managing theCompany’s business risks. By understanding and managing risk, the Company provides greater certainty andconfidence to the stockholders, employees, and the public in general.

The risk management framework encompasses the identification and assessment of business risks, development ofrisk management strategies, assessment/design/implementation of risk management capabilities, monitoring andevaluating the effectiveness of risk mitigation strategies and management performance, and identification of areasand opportunities for improvement in the risk management process.

A Chief Risk Officer (CRO) is the ultimate champion of enterprise risk management of the Group and oversees theentire risk management function. On the other hand, the Risk Management Unit provides support to the CRO and isresponsible for overall continuity. Beginning 2008, under an expanded charter, the Audit and Risk Committee willprovide a more focused oversight role over the risk management function. A quarterly report on the risk portfolio ofthe Group and the related risk mitigation efforts and initiatives are provided to the Audit and Risk Committee. TheCompany’s internal auditors monitor the compliance with Group’s risk management policies to ensure that aneffective control environment exists within the Group.

75

148 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

The Company engaged the services of an outside consultant to assist the Company in the roll-out of a more focusedenterprise risk management framework which included a formal risk awareness session and self-assessmentworkshops with all the functional units of the Company. The Company continues to monitor the major risk exposuresand the related risk mitigation efforts and initiatives.

The Audit and Risk Committee has initiated the institutionalization of an enterprise risk management function acrossall the subsidiaries and affiliates.

Financial Risk Management Objectives and PoliciesThe Group’s principal financial instruments comprise financial assets at FVPL, AFS financial assets, HTMinvestments, bank loans, corporate notes and bonds. The financial debt instruments were issued primarily to raisefinancing for the Group’s operations. The Group has various financial assets such as cash and cash equivalents,accounts and notes receivables and accounts payable and accrued expenses which arise directly from its operations.

The main purpose of the Group’s financial instruments is to fund its operational and capital expenditures. The mainrisks arising from the use of financial instruments are interest rate risk, foreign exchange risk, liquidity risk and creditrisk. The Group also enters into derivative transactions, the purpose of which is to manage the currency and interestrate risks arising from its financial instruments.

The Group’s risk management policies are summarized below:

Interest rate riskThe Group’s exposure to market risk for changes in interest rates relates primarily to the Company’s and itssubsidiaries’ long-term debt obligations. The Group’s policy is to manage its interest cost using a mix of fixed andvariable rate debt.

The following table demonstrates the sensitivity of the Group’s profit before tax and equity to a reasonably possiblechange in interest rates as of December 31, 2009 and 2008, with all variables held constant, (through the impact onfloating rate borrowings and changes in fair value of financial assets at FVPL).

December 31, 2009

Effect on profit before taxChange in basis points

+100 basis points -100 basis points(In Thousands)

FVPL financial assets (P=3,796) P=3,846Parent Company - floating rate borrowings (52,388) 52,388Subsidiaries - floating rate borrowings (49,700) 49,700

(P=105,884) P=105,934

Change in basis pointsEffect on equity

+100 basis points -100 basis points(In Thousands)

AFS financial assets (P=12,106) P=12,438

December 31, 2008

Effect on profit before taxChange in basis points

+100 basis points -100 basis points(In Thousands)

FVPL financial assets (P=10,295) P=10,475Parent Company - floating rate borrowings (52,425) 52,425Subsidiaries - floating rate borrowings (130,990) 130,990

(P=193,710) P=193,890

There is no other impact on the Group’s equity other than those already affecting the net income.

76

2009 ANNUAL REPORT 149

The terms and maturity profile of the interest-bearing financial assets and liabilities, together with its correspondingnominal amounts and carrying values (in thousands), are shown in the following table:

2009

Interest terms (p.a.)Rate Fixing

PeriodNominalAmount < 1 year 1 to 5 years > 5 years Carrying Value

GroupCash and cash

equivalentsFixed at the date of

investmentVarious P=45,656,889 P=45,656,889 P=– P=– P=45,656,889

Short-termsinvestments

Fixed at the date ofinvestment orrevaluation cut-off

Balance date 4,560,976 4,560,976 – – 4,560,976

Financial assetsat FVPL

Fixed at the date ofinvestment orrevaluation cut-off

Balance date 433,821 433,821 – – 433,821

Accounts andnotes receivable

Fixed at the date of sale Date ofsale

12,502,881 9,328,493 1,282,872 125,549 10,736,914

Quoted debtinvestments

Fixed at the date ofinvestment orrevaluation cut-off

Various 925,694 925,694 222,490 50,970 1,199,154

CompanyLong-term debtFixed

Fixed at 6.725% to 7.95%Fixed at 8.15%Fixed at 6.70% to 8.40%%Fixed at 6.75%

5 years6 years7 years

10 years

14,000,0001,000,0002,485,0001,498,333

45,000–

7,5001,667

13,955,0001,000,0001,477,500

6,666

––

1,000,0001,490,000

14,000,0001,000,0002,485,0001,498,333

FloatingVariable at 0.50% to

0.67% over 91-dayT-bills PDST-R1(formerly Mart1)

3 months 6,985,000 255,000 6,730,000 – 6,985,000

SubsidiariesShort-term debt

Variable ranging from1.9% to 3.9%

Monthly 968,783 968,783 – – 968,783

Variable ranging from5.0% to 9.5%

Monthly 1,669,875 1,669,875 – – 1,669,875

Long-term debtFixed

Fixed at 5.0% to 14.88% 3,5,7 and 10years

15,891,724 322,320 11,388,838 4,177,019 15,888,177

FloatingVariable 3 months,

semi-annual12,031,450 1,821,657 9,382,894 823,666 12,028,217

77

150 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

2008

Interest terms (p.a.)Rate Fixing

PeriodNominalAmount < 1 year 1 to 5 years > 5 years Carrying Value

GroupCash and cash

equivalentsFixed at the date of

investmentVarious P=42,885,792 P=42,885,792 P=– P=– P=42,885,792

Short-terminvestments

Fixed at the date ofinvestment orrevaluation cut-off

Balance date 1,008,924 1,008,924 – – 1,008,924

Financial assetsat FVPL

Fixed at the date ofinvestment orrevaluation cut-off

Balance date 1,778,720 1,778,720 – 1,778,720

Accounts andnotes receivable

Fixed at the date of sale Date ofsale

14,720,214 8,017,173 5,651,461 208,166 13,876,800

HTM Fixed at 16.50% 6 months 65,000 65,405 – – 65,405Company

Long-term debtFixed

Fixed at 6.70% 7 years 1,492,500 7,500 30,000 1,455,000 1,492,500Fixed at 6.75%Fixed at 6.825%Fixed at 10.00%Fixed at 10.375%Fixed at 6.725%

10 years5 years5 years7 years5 years

1,500,0006,000,0003,000,0004,170,0002,000,000

1,667––

10,000–

6,6676,000,0003,000,0004,160,0002,000,000

1,491,666––––

1,500,0006,000,0003,000,0004,170,0002,000,000

FloatingVariable at 0.50% to

0.67% over 91-dayT-bills PDST-R1(formerly Mart1)

3 months 6,990,000 5,000 6,985,000 – 6,990,000

SubsidiariesShort-term debt

Variable ranging from7.0% to 9.64%

Monthly 1,501,000 1,501,000 – – 1,501,000

Variable ranging from2.5% to 6.4%

Monthly 1,254,447 1,254,447 – – 1,254,447

Long-term debtFixed

Fixed at 9.5% 1 and 2years

33,500 33,500 – – 33,500

Fixed at 5.0% to 14.88% 3,5,7 and 10years

13,855,658 204,892 9,884,047 3,762,625 13,851,564

FloatingVariable at 1.00% to 1.5%

over 91-day PDST-For PDST-R1

3 months 1,625,000 39,250 435,350 1,146,394 1,620,994

Variable from 4.0% to15.0%

3 months 10,985,557 1,177,062 9,799,115 9,380 10,985,557

78

2009 ANNUAL REPORT 151

Foreign exchange riskThe Group’s foreign exchange risk results primarily from movements of the Philippine Peso (PHP) against the UnitedStates Dollar (US$). The Company may enter into foreign currency forwards and foreign currency swap contracts inorder to hedge its US$ obligations.

The table below summarizes the Group’s exposure to foreign exchange risk as of December 31, 2009 and 2008.Included in the table are the Group’s monetary assets and liabilities at carrying amounts, categorized by currency.

2009 2008US$ Php Equivalent* US$ Php Equivalent*

(In Thousands)AssetsCash and cash equivalents US$171,687 P=7,931,962 US$88,107 P=4,186,845Short term investments 6,576 303,811 6,120 290,822Accounts and notes receivables 1,968 90,932 107,245 5,096,282Total assets 180,231 8,326,705 201,472 9,573,949LiabilitiesAccounts payable and accrued

expenses 70,911 3,276,098 2,119 100,695Short-term debt 34,500 1,593,900 – –Long-term debt 155,000 7,161,000 175,000 8,316,000Total liabilities 260,411 12,030,998 177,119 8,416,695Net foreign currency denominated

assets (liabilities) (US$80,180) (P=3,704,293) US$24,353 P=1,157,254

*Translated using the exchange rate at the reporting date (US$1:P=46.200 in 2009, US$1:47.520)

The table below summarizes the exposure to foreign exchange risk of the subsidiaries with a functional currency ofUS$.

2009 2008PHP US$ Equivalent* PHP US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents P=446,323 US$9,661 P=783,272 US$16,483Accounts and notes receivables 194,834 4,217 236,652 4,980Other current assets 29,604 641 43,935 925Other non-current assets 38,413 831 – –Total assets 709,174 15,350 1,063,859 22,388LiabilitiesAccounts payable and accrued

expenses 551,037 11,927 534,193 11,241Other current liabilities 68,216 1,477 – –Short-term debt 71,000 1,537 – –Other noncurrent liabilities 27,343 592 – –Total liabilities 717,596 15,533 534,193 11,241Net foreign currency denominated

assets (liabilities) (P=8,422) (US$183) P=529,666 US$11,147*Translated using the exchange rate at the reporting date (P=1:US$0.022 in 2009, P=1:US$0.021 in 2008)

2009 2008SGD US$ Equivalent* SGD US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents SGD5,434 US$3,911 SGD12,976 US$8,944Accounts and notes receivables 717 515 142 98Other current assets – – 1,275 879Other noncurrent assets 5,611 4,037 8,074 5,565Total assets 11,762 8,463 22,467 15,486LiabilitiesAccounts payable and accrued

expenses 2,205 1,590 2,117 1,459Other current liabilities 2,085 1,349 – –Short-term debt 3,172 2,291 – –Long-term debt – – 6,949 4,790Other noncurrent liabilities 143 103 171 118Total liabilities 7,605 5,333 9,237 6,367Net foreign currency denominated

assets SGD4,157 US$3,130 SGD13,230 US$9,119*Translated using the exchange rate at the reporting date (SGD1:US$0.719 in 2009, SGD1:US$0.689 in 2008)

79

152 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

2009 2008JPY US$ Equivalent* JPY US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents JPY19,854 US$217 JPY44,824 US$493Accounts and notes receivables 151,583 1,696 92,418 1,016Other noncurrent assets 320 3 – –Total assets 171,757 1,916 137,242 1,509LiabilitiesAccounts payable and accrued

expenses 323,334 3,630 80,176 882Net foreign currency denominated

assets (liabilities) (JPY151,577) (US$1,714) JPY57,066 US$627

*Translated using the exchange rate at the reporting date (JPY1:US$0.011 in 2009 and 2008)

2009 2008HKD US$ Equivalent* HKD US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents HKD1,053 US$136 HKD106,845 US$13,787Accounts and notes receivables 97,199 12,542 106,559 13,750Other current assets 320 41 320 41Other noncurrent assets 16,541 2,134 16,541 2,134Total assets 115,113 14,853 230,265 29,712LiabilitiesAccounts payable and accrued

expenses 4,765 615 12,076 1,558Net foreign currency denominated

assets HKD110,348 US$14,238 HKD218,189 US$28,154*Translated using the exchange rate at the reporting date (HKD1:US$0.129 in 2009 and 2008)

2009 2008RMB US$ Equivalent* RMB US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents RMB43,235 US$6,333 RMB16,508 US$ 2,410Accounts and notes receivables 160,552 23,518 132,881 19,403Total assets 203,787 29,851 149,389 21,813LiabilitiesAccounts payable and accrued

expenses 234,361 34,081 103,097 15,054Other current liabilities 9 – – –Total liabilities 234,370 34,081 103,097 15,054Net foreign currency denominated

assets (liabilities) (RMB30,583) (US$4,230) RMB46,292 US$6,759

*Translated using the exchange rate at the reporting date (RMB1:US$0.146 in 2009 and 2008)

2009 2008GBP US$ Equivalent* GBP US$ Equivalent

(In Thousands)AssetsCash and cash equivalents GBP77 US$124 – –Accounts and notes receivables 642 1,035 – –Other noncurrent assets 775 1,250 – –Total assets 1,494 2,409 – –LiabilitiesAccounts payable and accrued

expenses 2,354 3,797 – –Other current liabilities 247 399 – –Total liabilities 2,601 4,196 – –Net foreign currency denominated

liabilities (GBP1,107) (US$1,787) – –

*Translated using the exchange rate at the reporting date (GBP1:US$0.914)

80

2009 ANNUAL REPORT 153

2009 2008INR US$ Equivalent* INR US$ Equivalent

(In Thousands)AssetsCash and cash equivalents INR20,467 US$441 – –Accounts and notes receivables 4,001 86 – –Other current assets 34,142 735 – –Total assets 58,610 1,262 – –LiabilitiesAccounts payable and accrued

expenses 67,627 1,456 – –Other current liabilities 25,361 546 – –Long-term debt 21,799 469 – –Total liabilities 114,787 2,471 – –Net foreign currency denominated

liabilities (INR56,177) (US$1,209) – –

*Translated using the exchange rate at the reporting date (INR1:US$0.022)

2009 2008THB US$ Equivalent* THB US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents THB4,846 US$146 THB4,846 US$137Accounts and notes receivables 1,591 48 – –Other current assets – – 92 3Other noncurrent assets 153,386 4,619 210,205 5,524Total assets 159,823 4,813 215,143 5,664LiabilitiesAccounts payable and accrued

expenses 182 5 144 4Net foreign currency denominated

assets THB159,641 US$4,808 THB214,999 US$5,660*Translated using the exchange rate at the reporting date (THB1:US$0.030 in 2009, THB1:US$0.028 in 2008 )

2009 2008MYR US$ Equivalent* MYR US$ Equivalent*

(In Thousands)AssetsCash and cash equivalents MYR3,567 US$1,052 MYR5,233 US$1,445Accounts and notes receivables 30 9 9 2Other current assets – – 68 19Other noncurrent assets 4,082 1,204 5,410 1,494Total assets 7,679 2,265 10,720 2,960LiabilitiesAccounts payable and accrued

expenses 78 23 78 22Other noncurrent liabilities 26 8 26 7Total liabilities 104 31 104 29Net foreign currency denominated

assets MYR7,575 US$2,234 MYR10,616 US$2,931*Translated using the exchange rate at the reporting date (MYR1:US$0.0.295 in 2009, MYR1:US$0.0.276 in 2008)

The following table demonstrates the sensitivity to a reasonably possible change in the exchange rate, with allvariables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets andliabilities) and the Group’s equity (in thousands).

2009

Currency

Increase (decrease) inPeso per foreign currency

depreciation (appreciation)

Effecton profit

before taxUS$ P=1.00 (P=80,180)

(1.00) 80,180

81

154 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Currency

Increase (decrease) inUSD per foreign currency

depreciation (appreciation)

Effecton profit

before taxPHP US$1.00 (US$8,422)

(US$1.00) 8,422SGD US$1.00 4,157

(US$1.00) (4,157)JPY US$1.00 (151,577)

(US$1.00) 151,577HKD US$1.00 110,348

(US$1.00) (110,348)RMB US$1.00 (30,583)

(US$1.00) 30,583GBP US$1.00 (1,107)

(US$1.00) 1,107INR US$1.00 (56,177)

(US$1.00) 56,177THB US$1.00 159,641

(US$1.00) (159,641)MYR US$1.00 7,575

(US$1.00) (7,575)

2008

Currency

Increase (decrease) inPeso per foreign currency

depreciation (appreciation)

Effecton profit

before taxUS$ P=1.00 P=24,353

(1.00) (24,353)

Currency

Increase (decrease) inUSD per foreign currency

depreciation (appreciation)

Effecton profit

before taxPHP US$1.00 US$529,666

(US$1.00) (529,666)SGD US$1.00 13,230

(US$1.00) (13,230)HKD US$1.00 218,189

(US$1.00) (218,189)RMB US$1.00 46,292

(US$1.00) (46,292)JPY US$1.00 57,066

(US$1.00) (57,066)THB US$1.00 215,143

(US$1.00) (215,143)MYR US$1.00 10,616

(US$1.00) (10,616)

There is no other impact on the Group’s equity other than those already affecting net income.

Price riskAFS financial assets are acquired at certain prices in the market. Such investment securities are subject to price riskdue to changes in market values of instruments arising either from factors specific to individual instruments or theirissuers or factors affecting all instruments traded in the market. Depending on the several factors such as interestrate movements, the country’s economic performance, political stability, domestic inflation rates, these prices change,reflecting how market participants view the developments.

The analysis below demonstrates the sensitivity to a reasonably possible change of market index with all othervariables held constant, of the Group’s equity (in thousands).

2009

Market Index Change in Variables Effect on EquityPSEi +5% P=168,206

-5% (168,206)

82

2009 ANNUAL REPORT 155

2008

Market Index Change in Variables Effect on EquityPSEi +5% P=38,096

-5% (38,096)

Liquidity riskThe Group seeks to manage its liquidity profile to be able to service its maturing debts and to finance capitalrequirements. The Group maintains a level of cash and cash equivalents deemed sufficient to finance operations.As part of its liquidity risk management, the Company regularly evaluates its projected and actual cash flows. It alsocontinuously assesses conditions in the financial markets for opportunities to pursue fund-raising activities.Fund-raising activities may include bank loans and capital market issues both on-shore and off-shore.

The table summarizes the maturity profile of the Group’s financial liabilities as of December 31, 2009 and 2008 basedon contractual undiscounted payments.

2009< 1 year 1 to < 2 years 2 to < 3 years > 3 years Total

(In Thousands)Accounts payable and

accrued expensesAccounts payable P=14,584,321 P=– P=– P=– P=14,584,321Accrued expenses 6,152,842 – – – 6,152,842Accrued project costs 2,136,700 – – – 2,136,700Dividends payable 2,264,306 – – – 2,264,306Accrued personnel

costs 427,502 – – – 427,502Related parties 105,355 – – – 105,355Retentions payable 120,938 – – – 120,938

Customers’ deposit 2,374,457 – – – 2,374,457Short-term debt 2,638,658 – – – 2,638,658Long-term debt 2,453,144 8,256,906 11,289,842 31,884,835 53,884,727Other noncurrent liabilities – 6,865,272 902,293 315,565 8,083,130

P=33,258,223 P=15,122,178 P=12,192,135 P=32,200,400 P=92,772,936

< 1 year 1 to < 2 years 2 to < 3 years > 3 years TotalInterest payable P=3,119,138 P=1,795,261 P=1,675,878 P=2,948,760 P=9,539,037

2008< 1 year 1 to < 2 years 2 to < 3 years > 3 years Total

(In Thousands)Accounts payable and

accrued expensesAccounts payable P=13,922,547 P=– P=– P=– P=13,922,547Accrued expenses 6,821,712 – – – 6,821,712Accrued project costs 2,022,903 – – – 2,022,903Dividends payable 1,333,740 – – – 1,333,740Accrued personnel

costs 823,717 – – – 823,717Retentions payable 262,330 – – – 262,330Related parties 135,739 – – – 135,739

Customers’ deposit 1,246,593 – – – 1,246,593Short-term debt 2,755,447 – – – 2,755,447Long-term debt 1,478,871 5,669,616 8,801,387 35,694,241 51,644,115Other noncurrent liabilities – 2,260,063 745,981 4,010,328 7,016,372

P=30,803,599 P=7,929,679 P=9,547,368 P=39,704,569 P=87,985,215

< 1 year 1 to < 2 years 2 to < 3 years > 3 years TotalInterest payable P=3,625,656 P=3,360,187 P=3,212,604 P=4,162,923 P=14,361,370

83

156 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

Cash and cash equivalents, short-term investments, financial assets at FVPL and AFS debt investments are used forthe Group’s liquidity requirements. Please refer to the terms and maturity profile of these financial assets under thematurity profile of the interest-bearing financial assets and liabilities disclosed in the interest rate risk section. AFSunquoted debt investments with maturity of more than a year from December 31 are marketable securities and couldbe sold as and when needed prior to its maturity in order to meet the Group’s short-term liquidity needs.

Credit riskThe Group’s holding of cash and short-term investments exposes the Group to credit risk of the counterparty. Creditrisk management involves dealing only with institutions for which credit limits have been established. The Group’streasury policy sets credit limits for each counterparty. Given the Group’s diverse base of counterparties, it is notexposed to large concentrations of credit risk.

The table below shows the maximum exposure to credit risk for the components of the consolidated statement offinancial position. The maximum exposure is shown at gross, before the effect of mitigation through the use of masternetting arrangements or collateral agreements.

2009 2008(In Thousands)

Cash and cash equivalents P=41,696,097 P=39,113,232Short-term investments 4,560,976 1,008,924Financial assets at FVPL 926,860 2,233,201Accounts and notes receivables

TradeReal estate 12,808,632 10,428,525Electronics manufacturing 3,867,003 3,115,891Automotive 818,850 639,346Information technology and business

process outsourcing 799,783 332,964International and others 3,700 3,940

Advances to other companies 2,888,665 3,643,843Related parties 3,384,955 7,861,125Investment in bonds classified as loans and

receivables 200,000 –Others 514,018 1,455,732

AFS financial assetsQuoted equity investments 877,509 1,449,982Unquoted equity investments 2,392,489 1,614,520Quoted debt investments 1,199,154 –

HTM investmentsBonds – 65,405

Total credit risk exposure P=76,938,691 P=72,966,630

84

2009 ANNUAL REPORT 157

The analysis of accounts and notes receivables that are past due but not impaired follows:

December 31, 2009

Neither PastDue nor Past Due but not Impaired

Impaired <30 days 30-60 days 60-90 days 90-120 days >120 days Total Impaired Total(In Thousands)

Trade:Real estate P=10,616,823 P=706,133 P=309,749 P=296,463 P=263,399 P=640,257 P=2,216,001 P=178,618 P=13,011,442Electronics

manufacturing 3,634,407 88,862 69,953 14,462 15,810 43,509 232,596 14,436 3,881,439Information

technology andBPO 272,769 677 406,287 – 99,157 20,893 527,014 77,405 877,188

Automotive 562,613 152,945 48,798 15,412 9,772 29,310 256,237 30,451 849,301International and

others 2,263 3 635 – – 799 1,437 103 3,803Related parties 3,216,798 106,132 13,169 3,074 28,319 17,463 168,157 5,206 3,390,161Advances to other

companies 1,689,117 73,816 177,172 50,595 38,763 859,202 1,199,548 – 2,888,665Investment in bonds

classified as loansand receivables 200,000 – – – – – – – 200,000

Others 522,926 134 419 1,109 908 266 2,836 30,827 556,589Total P=20,717,716 P=1,128,702 P=1,026,182 P=381,115 P=456,128 P=1,611,699 P=4,603,826 P=337,046 P=25,658,588

December 31, 2008

Neither PastDue nor Past Due but not Impaired

Impaired <30 days 30-60 days 60-90 days 90-120 days >120 days Total Impaired Total(In Thousands)

Trade:Real estate P=8,132,446 P=907,944 P=267,659 P=369,772 P=132,440 P=671,869 P=2,349,684 P=83,124 P=10,565,254Electronics

manufacturing 2,942,598 138,169 16,415 244 – 18,465 173,293 36,277 3,152,168Automotive 245,499 274,359 89,929 28,933 7,777 18,956 419,954 217 665,670Information

technology andBPO 200,326 64,596 20,296 31,365 16,381 – 132,638 19,120 352,084

International andothers – 1,542 1,681 258 189 270 3,940 60,134 64,074

Advances to othercompanies 2,429,488 249,737 27,017 383,020 8,563 546,018 1,214,355 – 3,643,843

Related parties 7,634,485 56,138 47,536 44,731 41,372 36,863 226,640 8,018 7,869,143Others 1,067,694 38,823 69,285 72,592 87,538 76,826 345,064 114,203 1,526,961Total P=22,652,536 P=1,731,308 P=539,818 P=930,915 P=294,260 P=1,369,267 P=4,865,568 P=321,093 P=27,839,197

85

158 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

The table below shows the credit quality of the Group’s financial assets as of December 31, 2009 and 2008(in thousands):

December 31, 2009Neither past due nor impaired Past due but

High Grade Medium Grade Low Grade Total not impaired Impaired TotalCash and cash equivalents P=45,656,889 P=– P=– P=45,656,889 P=– P=– P=45,656,889Short-term investments 4,560,976 – – 4,560,976 – – 4,560,976FVPL financial assets 926,860 – – 926,860 – – 926,860Accounts and notes receivables

TradeReal estate 9,151,761 854,788 610,274 10,616,823 2,216,001 178,618 13,011,442Electronics manufacturing 3,269,152 334,198 31,057 3,634,407 232,596 14,436 3,881,439Information technology and BPO 272,769 – – 272,769 527,014 77,405 877,188Automotive 381,983 180,630 – 562,613 256,237 30,451 849,301International and others – 2,263 – 2,263 1,437 103 3,803

Related parties 3,102,245 31,457 83,096 3,216,798 168,157 5,206 3,390,161Advances to other companies 1,668,211 4,317 16,589 1,689,117 1,199,548 – 2,888,665Investments in bonds classified as

loans and receivables 200,000 – – 200,000 – – 200,000Others 522,792 134 – 522,926 2,836 30,827 556,589

AFS InvestmentsQuoted shares of stocks 877,509 – – 877,509 – – 877,509Unquoted shares of stocks – 2,392,489 – 2,392,489 – – 2,392,489Quoted debt investments 1,199,154 – – 1,199,154 – – 1,199,154

P=71,790,301 P=3,800,276 P=741,016 P=76,331,593 P=4,603,826 P=337,046 P=81,272,465

December 31, 2008Neither past due nor impaired Past due but

High Grade Medium Grade Low Grade Total not impaired Impaired TotalCash and cash equivalents P=42,885,792 P=– P=– P=42,885,792 P=– P=– P=42,885,792Short-term investments 1,008,924 – – 1,008,924 – – 1,008,924FVPL financial assets 2,233,201 – – 2,233,201 – – 2,233,201Accounts and notes receivables

TradeReal estate 6,042,439 1,600,010 489,997 8,132,446 2,349,684 83,124 10,565,254Electronics manufacturing 867,658 1,682,919 392,021 2,942,598 173,293 36,277 3,152,168Automotive 192,080 53,419 – 245,499 419,954 217 665,670Information technology and BPO 200,326 – – 200,326 132,638 19,120 352,084International and others – – – – 3,940 60,134 64,074

Advances to other companies 2,407,629 7,942 13,917 2,429,488 1,214,355 – 3,643,843Related parties 6,967,055 667,430 – 7,634,485 226,640 8,018 7,869,143Others 928,795 138,899 – 1,067,694 345,064 114,203 1,526,961

AFS InvestmentsQuoted shares of stocks 1,449,982 – – 1,449,982 – – 1,449,982Unquoted shares of stocks – 1,614,520 – 1,614,520 – – 1,614,520

HTM InvestmentsQuoted debt investments 65,405 – – 65,405 – – 65,405

P=65,249,286 P=5,765,139 P=895,935 P=71,910,360 P=4,865,568 P=321,093 P=77,097,021

The credit quality of the financial assets was determined as follows:

Cash and cash equivalents, short-term investments, FVPL financial assets, quoted AFS financial assets, HTMinvestments, advances to other companies and related party receivablesHigh grade pertains to cash and cash equivalents and short-term investments, quoted financial assets, related partytransactions and receivables with high probability of collection.

Medium grade pertains to unquoted financial assets other than cash and cash equivalents and short-terminvestments with nonrelated counterparties and receivables from counterparties with average capacity to meet itsobligation.

Low grade pertains to financial assets with the probability to be impaired based on the nature of the counterparty.

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2009 ANNUAL REPORT 159

Trade receivablesReal estate - high grade pertains to receivables with no default in payment; medium grade pertains to receivables withup to 3 defaults in payment; and low grade pertains to receivables with more than 3 defaults in payment.

Electronics manufacturing - high grade pertains to receivable with favorable credit terms and can be offered with acredit term of 15 to 45 days; medium grade pertains to receivable with normal credit terms and can be offered with acredit term of 15 to 30 days; and low grade pertains to receivables under advance payment or confirmed irrevocableStand-by Letter of Credit and subjected to semi-annual or quarterly review for possible upgrade.

Automotive - high grade pertains to receivables from corporate accounts and medium grade for receivables fromnoncorporate accounts.

AFS financial assets - the unquoted investments are unrated.

31. Registration with the Philippine Export Zone Authority (PEZA)

Some activities of certain subsidiaries are registered with the PEZA. Under the registration, these subsidiaries areentitled to certain tax and nontax incentives, which include, but are not limited to, income tax holiday (ITH) and duty-free importation of inventories and capital equipment. Upon the expiration of the ITH, the subsidiaries will be liable forpayment of a five percent (5%) tax on gross income earned from sources within the PEZA economic zone in lieu ofpayment of national and local taxes.

32. Note to Consolidated Statements of Cash Flows

The Group’s noncash investing activity in 2009 pertains to the loans receivable from EGS Corp. that were transferredto Stream as part of the Agreement amounting to P=1,699.6 million (US$35.8 million).

33. Interest in a Joint Venture

MDC has a 51% interest in Makati Development Corporation - First Balfour, Inc. Joint Venture (the Joint Venture), ajointly controlled operation whose purpose is to design and build St. Luke’s Medical Center (the Project) in FortBonifacio Global City, Taguig.

The Project was started on January 31, 2007. The Project is a world-class medical facility comprising, more or less,of a 611-bed hospital and a 378-unit medical office building, with an approximate gross floor area of 154,000 squaremeters, which meets international standards, and all standards and guidelines of applicable regulatory codes of thePhilippines and complies with the criteria of the Environment of Care of the Joint Commission InternationalAccreditation.

The Group’s share in the assets, liabilities, income and expenses of the Joint Venture at December 31, 2009 and2008 and for the years then ended, which are included in MDC’s financial statements, are as follows:

2009 2008(In Thousands)

Current assetsCash and cash equivalents P=150,805 P=181,953Receivables 191,809 440,569Due from customers for contract work 61,379 229,596Inventory – 18,349Other current assets 46,326 135,674

Property and equipment 22 16,978Total assets 450,341 1,023,119Current liabilities 226,545 802,821Revenue 835,615 1,422,023Contract costs (730,779) (1,218,026)Interest and other income (583) 16,516Income before income tax 104,253 220,513Income tax (831) (2,250)Net income P=103,422 P=218,263

Provision for income tax pertains to final tax on interest income.

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160 AYALA CORPORATION

Notes to Consolidated Financial StatementsAyala Corporation and Subsidiaries

34. Commitments and Contingencies

CommitmentsALI has an existing contract with the Bases Conversion Development Authority (BCDA) to develop, under a leaseagreement, a mall with an estimated gross leasable area of 152,000 square meters on a 9.8-hectare lot inside FortBonifacio. The lease agreement covers 25 years, renewable for another 25 years subject to reappraisal of the lot atmarket value. The annual fixed lease rental amounts to P=106.5 million while the variable rent ranges from 5% to 20%of gross revenue.

Subsequently, ALI transferred its rights and obligations granted to or imposed under the lease agreement to SSECC,its subsidiary, in exchange for equity.

As part of the bid requirement, ALI procured a performance bond in 2003 from the Government Service InsuranceSystem in favor of BCDA amounting to P=3.9 billion to guarantee the committed capital to BCDA. Moreover, SSECCobtained standby letters of credit to guarantee the payment of the fixed and variable rent as prescribed in the leaseagreement.

On April 15, 2003, ALI entered into a Joint Development Agreement (JDA) with BCDA for development of another lotinside Fort Bonifacio with a gross area of 11.6 hectares for residential purposes. Pursuant to the agreement, BCDAshall contribute its title and interest to the lot and ALI in turn shall provide the necessary cash and expertise toundertake and complete the implementation of the residential development. ALI commits to invest sufficient capital tocomplete the residential development.

ALI procured a surety bond with a face value of P=122.9 million issued by an insurance company in favor and for thebenefit of BCDA as beneficiary. The surety bond shall be continuing in nature and shall secure the obligation of ALIto pay BCDA annual minimum revenue share for each of the first 8 selling periods of the residential project.

In 2002, ALI agreed to underwrite the subscription to NTDCC additional shares amounting to P=1.4 billion over a4-year equity schedule up to 2007 in exchange for a 5% underwriting fee (net of a 1.5% rebate to existingshareholders who subscribed).

MDC, in the normal course of business, furnishes performance bonds in connection with its construction projects.These bonds shall guarantee MDC’s execution and completion of the work indicated in the respective constructioncontracts.

On April 15, 2008, the Company acted as guarantor to a US$50 million transferable term loan facility between AYC, asubsidiary, as borrower and several lenders who are also the lead arrangers of the Agreement.

Repayment dates for advances made to AYC are in six-month intervals from 2011 to 2013. The Companyunconditionally guaranteed the due and punctual payment of advances if for any reason AYC does not make timelypayment. The Company waived all rights of subrogation, contribution, and claims of prior exhaustion of remedies.The Company’s obligation as guarantor will remain in full force until no sum remains to be lent by the lenders, and thelenders recover the advances.

AINA obtained a US$3.0 million letter of credit as security for the release of a loan to one of its subsidiaries. Assecurity for the letter or credit, AINA is required to maintain a US$3.0 million certificate of deposit with the bank.AINA, together with another individual, jointly and severally guarantees the obligation of its subsidiary.

Share sale and purchase agreement with United Utilities (UU)On November 11, 2009, the Company, UU and Philwater Holdings, Inc. signed agreements for the Company’sacquisition of UU’s 81.9 million common shares and economic interest in 2 billion preferred shares in MWCI for a totalconsideration of P=3.5 billion.

As of December 31, 2009, the MWCI shares held by UU was not transferred to the Company pending compliance ofcertain conditions precedents under the Share Sale and Purchase Agreement (see Note 35).

ContingenciesThe Group has various contingent liabilities arising in the ordinary conduct of business which are either pendingdecision by the courts or being contested, the outcome of which are not presently determinable.

In the opinion of management and its legal counsel, the eventual liability under these lawsuits or claims, if any, will nothave a material or adverse effect on the Group’s financial position and results of operations.

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2009 ANNUAL REPORT 161

As a result of the explosion which occurred on October 19, 2007 at the basement of the Makati Supermarket Building,the Philippine National Police - Multi-Agency Investigation Task Force and the Department of Interior and LocalGovernment - Inter-Agency task Force (DILG-IATF) filed complaints with and recommended to the Department ofJustice (“DOJ”) the prosecution of certain officers/employees of Makati Supermarket Corporation, the owner of thebuilding, as well as some officers/employees of Ayala Property Management Corp. (APMC), among other individuals,for criminal negligence. In a Joint Resolution dated April 23, 2008, the DOJ special panel of prosecutors ruled thatthere was no probable cause to prosecute the APMC officers/employees for criminal negligence. This was affirmedby the DOJ Secretary in a Resolution dated November 17, 2008. A Motion for Reconsideration was filed by the DILG-IATF to question the DOJ Secretary’s Resolution which remains unresolved to date. No civil case has been filed byany of the victims of the incident.

35. Events after the Reporting Period

The CompanyOn March 4, 2010, the Company completed the acquisition of UU’s 81.9 million common shares and economicinterest in 2 billion preferred shares in MWCI. The acquisition increased the Company’s interest in MWCI from 31.7%to 43.3%.

In various dates from January 1 to March 10, 2010, the Company bought a total of 1.34 million common sharesamounting to P=395.4 million as part of the Company’s share buyback program.

IMIListing by Way of IntroductionOn December 9, 2009, the BOD of PSE approved the application of IMI for the initial listing by way of introduction of1,137,708,197 common shares, with a par value of P=1.00 per share, under the First Board of the Exchange, at anindicative opening price of P=6.24 per share. On the same day, the PSE approved the application of IMI to listadditional 146,681,420 common shares to cover IMI’s ESOWN. The listing ceremony was held on January 21, 2010.On this date, IMI’s stock symbol, IMI, officially entered into the electronic board of the PSE marking the start of publictrading of its common shares through the stock market.

Restructuring planOn January 21, 2010, the IMI’s BOD approved another restructuring plan. IMI estimated to incur about $0.64 million(P=30.0 million) as a result of this restructuring. The employees that will be laid off will come from two projects of IMIthat will end its manufacturing agreements in February 2010. Most of the employees included in the restructuringplan are in the operator level. It is expected that the restructuring will be carried out and completed by March 2010.

IntegreonOn February 16, 2010, Actis LLP, an emerging market private equity specialist, invested US$50.0 million for a 37.7%interest in Integreon.

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PPAARRTTIIEESS TTOO TTHHEE OOFFFFEERR The Company Ayala Corporation

33rd Floor Tower One Ayala Avenue corner Paseo de Roxas Makati City 1200 Philippines Tel. No.: (632) 848-5643

Issue Manager BPI Capital Corporation 8th Floor BPI Building Ayala Avenue corner Paseo de Roxas Makati City 1200 Tel. No. (632) 816-9580

Co-Issue Manager First Metro Investment Corporation 45th Floor GT Tower International 6813 Ayala Avenue, corner H.V. Dela Costa Street Makati City

Joint Lead Underwriters BDO Capital Corporation BPI Capital Corporation Citicorp Capital Philippines, Inc. First Metro Investment Corporation The Hongkong and Shanghai Banking Corporation Limit ed ING Bank, N.V., Manila Branch RCBC Capital Corporation Standard Chartered Bank

Legal Counsel to the Issuer Ayala Group Legal 32nd Floor Tower One Ayala Triangle Ayala Avenue Makati City 1226 Tel. No.: (632) 841-5336

Legal Counsel to the Issue Manager and the Underwriters

Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City

Trustee to the Bondholders

Metropolitan Bank and Trust Company – Trust Banking Group 18th Floor GT Tower International 6813 Ayala Avenue, corner H.V. Dela Costa Street Makati City

Registrar Philippine Depository and Trust Corporation 37/F Enterprise Tower One 6766 Ayala Avenue, Makati City Tel. No. (632) 884-5000

Paying Agent BPI Stock Transfer Office 16th Floor BPI Building Ayala Avenue corner Paseo de Roxas Makati City 1200

Independent Public Accountants SyCip Gorres Velayo & Co 6760 Ayala Avenue, Makati City 1200 Tel. No. (632) 891-0307